The collapse of the economy due to coronavirus: what you need to know - ForumDaily
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The collapse of the economy due to coronavirus: what you need to know

Coronavirus will continue to shake the global economy. The stock market is falling, the recession is approaching, the Fed is lowering interest rates, reports USA Today.

Photo: shutterstock

All this resembles the crisis of 2008.

For many Americans, the falling sales market and the growing talk of recession over the past few weeks, triggered by the global spread of coronavirus, are reviving memories of the 2008 financial crisis and the Great Recession.

Although the consequences that the disease that has spread in the country may ultimately lead to are not clear, the economic shocks caused by the outbreak are not likely to be as devastating and lasting as the historical recession of 2007-2009.

"An economic downturn is not inevitable. If a recession does occur, it will likely be brief and much less severe than the Great Recession." says Gus Faucher, chief economist at PNC Financial Services Group.

The financial crisis and the 2008 recession were the result of many weaknesses in the economy over the years. Now this is not so. What we see is caused by external factors.

At present, consumers, enterprises and lenders are much better prepared for possible shocks, and will be able to recover from them faster.

On the subject: 'Fragile, handle with care': expert forecasts on the global economy for 2020

Comparison of the current coronavirus crisis and the 2008 crisis

Cause

Great recession. The decline was caused by surges in the housing market. Banks and other lenders approved mortgages, including for many unskilled buyers, which raised house prices to sky-high levels. Banks combined mortgages into securities and sold them to other financial institutions.

When home prices began to decline, millions of Americans stopped paying mortgage loans and lost their homes, while banks, holders of securities, were on the verge of bankruptcy.

Frequent layoffs in real estate, construction, and banking led to lower consumer spending and an even more serious job loss in the entire economy. Bank lending was almost frozen, which led to an almost complete halt in the economy. Problems in the housing market and the banking system have accumulated over the years.

The current crisis. Coronavirus, which arose in China at the end of last year, creates a dangerous economic situation. Currently, more than 100 cases of the disease are registered in the world, most of which are in China, and the death toll has exceeded 000. In the United States, more than 4000 people have been infected and 800 have died.

Since far fewer people were affected than in 2007-2009, economic damage is still not high. The travel and tourism industry has suffered the most. Businesses canceled conferences and exhibitions, and consumers abandoned vacation plans. Due to disruptions in the supply of industrial parts and retail goods from China, American factories may temporarily close and store shelves remain empty.

As Americans try to avoid crowded places, the virus is likely to hurt sales in restaurants, malls, and other places. According to Cuebiq, a consumer data company, the number of visitors to Walmart stores dropped 16,5% in the last week of February compared to the previous week. However, in the same week, traffic at Costco stores grew by 7,7%.

Household debt

Great recession. Since banks freely issued loans for mortgages, car loans and credit cards, according to Oxford Economics and the Federal Reserve, household debts rose to a record 134% of gross domestic product. Americans saved just 3,6% of their income at the end of 2007. When the Americans paid off these debts, spending fell sharply.

The current crisis. Household debt is historically low at 96% of GDP. Households save about 8% of their income. All of this means that they can deal with short-term downturns and lower spending.

Job loss

Great recession. Nearly 9 million Americans lost their jobs in a recession. Unemployment more than doubled to 10%.

The current crisis. Layoffs are likely to number in the thousands, with many of them occurring in travel, tourism, and manufacturing. The unemployment rate of 3,5%, a 50-year low, can rise to 3,8% to 4,1%. This was stated by chief economist of Grant Thornton Diane Swank.

How long will it last

Great recession. The recession with millions of unemployed, reduced spending on households and businesses lasted 18 months.

The current crisis. It is estimated that the number of cases will peak in the next few months and decline by summer, Swank says that any decline will probably last a maximum of six months or so.

Economy

Great recession. During the recession, economic performance declined in five out of six quarters, falling 8,4% at the end of 2008.

The current crisis. Most economists expect the virus to undermine economic growth by one or two percent in the next couple of quarters.

Stock market

Great recession. During the crisis, the stock market fell by 57%.

The current crisis. The stock market did not see the dramatic drop that the market experienced at the height of the financial crisis. The Standard & Poor's 500 Index on Tuesday February 19, fell 14,9%, being at the bottom of the market, or falling from a peak of 20%.

Corporate health

Great recession. As of March 31, 2009, corporations had $ 5,8 trillion in debt, according to S&P Global Ratings. Less than two thirds, or about 65%, were highly likely to be able to repay it.

After falling revenues, many companies, including financial institutions, car manufacturers and retailers, collapsed.

According to the Bureau of Labor Statistics, from January 2008 to January 2010 in the automotive sector, manufacturers reduced about 278 jobs, or about 400% of their collective workforce, mainly automakers and suppliers fell under the reduction.

Car companies are particularly vulnerable to economic downturns because people often put off buying a car until economic conditions improve. U.S. car sales plummeted during the Great Recession.

The current crisis. S&P Global Ratings predicted that corporations had $ 2019 trillion in debt in 9,3.

But a higher percentage of corporate debt today is considered investment, at 72%.

The main sector, which, in all likelihood, will not be able to make payments on time, as of 2019, has become the automotive industry, where 4 out of 5 companies have theoretical debt.

Another sector at significant risk is retail, where department stores, malls and many other stores are already experiencing difficulties.

Although the oil and gas sector is expected to be hit hard by a sharp drop in oil prices, the industry is poised for a crisis. Only 31% of oil and gas companies were in arrears in 2019.

Banking Rules

Great recession. The global financial crisis has led to radical changes in the regulation of the banking industry by the US government. New changes included the Dodd-Frank Act in 2010, which required banks to have more cash in reserves to provide a cushion in case the financial system faced economic shocks.

In the US, banks with assets of more than $ 100 billion must pass the “stress tests” of the Federal Reserve System in order to be able to provide financial firms with the capital needed to continue working during periods of economic downturn.

Of course, in the near future, the profitability of banks may be at risk if they are forced to tighten lending standards. A recent historical fall in bond yields has also put pressure on banks.

Financial institutions, usually regional banks, may encounter obstacles in the coming months if they borrow money from energy companies. After all, their shares after a sharp drop in oil prices fell in price. But large banks are unlikely to face serious risks, as they tend to be more diversified and not concentrated in one sector.

The current crisis. The magnitude of the problems faced by the economy is not as terrible as during the Great Recession, experts say.

Stock prices have fluctuated during past epidemics, experts say, however, it is difficult to draw parallels between the recent rapid decline in the financial market and past failures.

“This is not a financial crisis, this is a global epidemic,” says Jonathan Corpina, senior managing partner at broker-dealer Meridian Equity Partners.

The price of a stock versus the profit that companies generate is the way that investors measure the value in the stock market. According to this indicator, the price-to-earnings ratio when the S&P 500 peaked in mid-February was 19. This is up from 12,5 in March 2008. It's also above the 5-year average of 16,7 and the 10-year average of 15.

Fed

Great recession: The key interest rate of the Federal Reserve System in 2007 was 5,25%, as concerns about housing collapse intensified. This gave the central bank ample opportunity to cut interest rates to almost zero by the end of 2008. The Fed has also launched unprecedented bond purchases to lower long-term rates such as mortgages.

The current crisis: The basic rate of the Fed is in the range of only 1% to 1,25%, which provides little room for reduction. And 10-year Treasury rates are already below 1%, which raises questions about the effectiveness of the new bond purchase campaign.

On the subject: The recession is canceled: the US economy pleased with an unexpected indicator

Stimulus

Great recession: the recession damaged the entire economy, and therefore Congress decided to take some kind of stimulus. The American law on compensation and reinvestment of $ 787 billion allowed to save on taxes and loans to individuals and companies. Funding was provided for medical centers and schools, low-income workers, and large-scale modernization of transport, energy and communication networks was approved.

The current crisis: the damage this time is less significant, and lawmakers are discussing more targeted measures, such as helping travel companies and compensating for loss of income for hourly workers, by increasing paid sick leave and unemployment insurance.

Housing

Great recession: According to the National Association of Realtors, by 2006, house prices more than doubled, and then plummeted. The housing market remained in decline until 2012.

The current crisis: although prices have risen sharply in recent years, they are only 22% above their peak. Focher says home prices are not overpriced. This means that with low mortgage rates, the housing market can help eliminate problems in other sectors of the economy.

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