The Economic Tsunami is at Hand

As global attention is fixed on the increasing and frightening death toll of COVID-19, many might be caught out by the economic tsunami it would unleash which would devastate the global economy and reduce the standard of living across all nations. Unfortunately, there is nothing we can do about it. And it's going to stem from the aggregation of all the individual and business decisions we have taken in the last four months and the ones that would be taken in the next four months.
When the pandemic started in China and spread like a wild harmattan fire throughout the globe, government officials were faced with the choice of either taking a stand for health or the economy. It was a choice between the devil and the deep blue sea. Political leaders worldwide largely chose the deep blue sea and stood for health. Businesses were shuttered and movements were clamp down upon. That stand for health is what is going to unleash the devil of an economic tsunami that might put the great depression of 1930s in the shades.
Now let me break it down in simple economic terms. Businesses are economic agents, shutting them down precludes them from producing goods or services, which means they are not generating revenue. But many of them would still incur cost: rent payment for their offices, loan obligations with the attendant interest rate payment, workers’ salaries. If they have to survive, they would have to reduce cost, one of which is laying off workers which is already happening and would continue into the unforeseeable future. Now millions of businesses sacking workers at about the same time would greatly reduce the disposable income available to families for spending.
Still, because businesses were closed they also did not spend, a necessary economic activity critical to the health of the economy. This means for the period they were closed they did not buy office papers, ink for printers, toilet papers, and the raw materials or inputs that are specific for the running of that particular business. Now millions of businesses shutting down at the same time means that the economy is being deprived of spending activities critical to his health.
The flip side of the coin is that Individuals are also economic agents and when we stayed at home, we didn't drive our cars as we would, we didn't patronize cinemas, go to restaurants for dinners, or go to sporting arenas for games, which represent great losses to the GDP. The multiplied effect of all the aforementioned would no doubt keel over the global economy into a terrible recession with the attendant millions of job losses and fall in standard of living. But the bad news does not even end there. When the lockdown, which might span several months, eventually tappers off, our attitude would have been conditioned and it wouldn’t be business as usual. For instance, people would be hesitant to go to sporting arenas or cinemas for fear of catching the virus. Airlines won’t be able to carry full capacity as they would be forced to practice social distancing. Business models that thrive on customers congregating in a space will suffer greatly such as musical concerts, sporting events in stadiums, hotel and restaurant business, party planners, transportation etc. Many sectors of the economy will feel the pain and may be unable to crawl back to their pre- COVID-19 height and revenue in many years to come.
Already the pandemic has pinched the oil sector as crude oil price has crashed spectacularly, even falling below one dollar per barrel at a point. While many found this phenomenon strange, it was just simply the law of supply and demand taking effect. When supply vastly outstrips demand prices tumble like a pack of cards. The global lockdown undoubtedly crippled transportation, an economic activity that gulps up most of the oil demand. At the other end of the spectrum, oil producing nations kept the rigs rolling pumping more oil, flying in the face of a collapse in demand. Oil buyers who had used up all their excess storage capacity had nowhere to keep the oil that was being shipped out by producing nations. Hence even if the oil were free, buyers could still not take it as there was nowhere to store them.
Expectedly, the collapse in the price of crude oil threw the budget of many oil producing countries into a quicksand, forcing some to seek external loans from multilateral institutions. Such loans inevitably come with the attendant stringent conditionalities one of which is the devaluation of a country’s currency. This condition would clearly lead to inflation or even stagflation in the import dependent oil producing economies.
It should also be expected that when businesses open fully, most if not all would scale back on their investment plans. For instance, cement companies who had plans to open a new factory before the pandemic would shelve such plans. Banks that had penciled down opening of new branches before the pandemic would pike out of it. Thus we would have a scenario were businesses are spending less, households are also spending less; while at the other end of the spectrum export of goods are declining because import dependent countries cannot afford them as their currency have been devalued: A perfect storm that would tank global demand and also devastate the global economy.
But it could still get worse. Historians would warn that the probability of a global war inevitably lurks whenever there is a global economic down turn. Already some countries have silently mooted the idea of meting some sort of punishment or demanding compensation from China. That certainly won’t go down well with the Asian tiger who has the world’s largest army. Hence the troubles we are experiencing now might be a tea party compared to what’s in the dark horizon.