COVID-19 – The financial crisis of 2008 was a piece of cake
The world has seen difficult financial times before, like the ‘Black Tuesday’ in 1929, which we all know as the ‘Great Crash of Wall Street’. Only 13 years ago, we were able to observe another crash originating in the USA but spreading all over the world to end in a global financial crisis. Yet we see ourselves heading towards the next crisis at a frightening pace due to COVID-19, but surely, we should be prepared and have learned our lesson from mastered crisis’.
Unfortunately, the unpleasant truth is that the world has not seen this kind of crisis before, as it is constituted genuinely different from the ones we already went through. This time the financial insecurity hasn’t been caused by banks or real estate market; it has been triggered by the global COVID-19 virus which led to the shutdown of economies backbone – SME businesses. The mentioned shutdown has resulted in a short-term demand and supply shock of real-economy to first affect the stock exchange due to its pro-active market responsiveness.
Further effects are the inflation of bonds and company shares as it takes some time for rating agencies screening forecasts and month-end reports until updating the credit rating of companies and governmental entities. The United Kingdom, Mexico, Brasil, Argentina, Iran, Irak and many others have already been cut.
Eventually, the real estate market will as well see a correction of the booming prices due to a rising supply but limited buyers in the market, partially as an effect of travel boundaries and decreasing cash pools of investors and individuals. If there are only ten local prospective buyers compared to hundreds of international interested parties, the current peek prices will no longer be achieved.
As an upside, we don’t expect hyperinflation to kick-in caused by billions of Pounds, Dollars and Euros simultaneously flooding the markets for the sake of securing liquidity. Indeed, central banks had no other choice but to keep the printer on full throttle to steer against the sharp drop in the stock market. In contrast to an earlier crisis, globalisation and digitalisation have driven the supply of equivalent products to a majority of goods and services, e.g. Cinema vs Netflix, Restaurants vs Delivery Services, Physical Meetings vs Video Conferences. Besides, shelves in most supermarkets around the world are still filled with necessities despite numerous media promotions regarding panic buying.
As it happens, the real threat this time is the shutdown of SMEs, the resulting mass unemployment and the dropping purchasing power. Millions of people all around the world are losing their jobs, struggling to pay their rent and mortgages while facing severe existential issues. In the aftermath, tax deficiency, reduced economic growth, and ongoing down grades of institutions and countries as a whole will also impact the stock market in the long run. Hence, we expect further global economic struggles to highly depend on the realisation of global decision makers’ strategies
A lesson taught from past experience illustrates that a financial crisis always shows unexpected long-term collateral. The Imperial College of London has released a study in 2016, stating an additional 260,000 deaths linked to the financial crisis of 2007/08. This frightening result has been assigned solely to unaffordable or late cancer diagnosis/therapies of countries without universal healthcare in the OECD like the US or UK.
Within the energy sector, business is still running as usual with some effects of dropping prices due to the reduced demand. On the other hand, postponement of new installations is inevitable due to the COVID-19 contact restrictions. Power utilities and O&M companies are classified as being essential infrastructure, which enables their staff to hit the road and keep the energy flowing. Although the restrictions and enhanced H&S measures (PPE, scheduling of lone working, unavailability and avoidance of hotels, increases of travel time, etc.) also bear additional costs to the energy sector, it has been vastly unaffected so far.
Ending this blog post with some good news, Forbes has published an astonishing figure of 72% of all energy project in 2019 were renewable, which would be an eager target for the FY2020 as well.
What direction do you see our economy heading towards considering the COVID-19 effects?
Most developed countries are expected to recover by mid 2021, but your average developing country might have more internal unstabily. The unemployment level of skilled/ educated remains stagnant a civil disobedience against the government might happen soon.
Also you article was very detailed ???? I recently started blogging and reading such articles encourages me to research more and write.
Where did you get the statement of most developed countries to be recovered by mid 2021? We disagree as most countries are in the middle of the so called second wave at the moment; talking and executing another country-wide lockdowns (Israel) or regional lockdowns (UK, etc.). Austria for example will have a deficit in budget of 20 billion Euro which, with all due respect, will not be recovered by mid 2021.
P.S. thank you 🙂