Coronavirus and 2008 Financial Crisis - Where are the Similarities?

In the year of 2020, at the mark of a new decade, came with it a new pandemic that saw unrivaled and monumental moves rock the financial markets and business confidence.

In the year of 2020, at the mark of a new decade, came with it a new pandemic that saw unrivaled and monumental moves rock the financial markets and business confidence. The Coronavirus, named now as Covid-19, has seen over 550,000 globally infected, with multiple companies around the globe forced to close business in the advent of preventing the spread of the disease, and with some counties’ governments enforcing a mandatory lock down – a policy that has not been invoked since the Second World War. Markets have consequently responded, with declines in major indices such as the FTSE 100 and Dow Jones Industrial Averages who recently saw their biggest one-day declines since 1987 and trading closing prematurely to avoid mass market selling sessions. Same day double digit declines in these indices are a red flag which trigger these events and have been frequent in these times. (BBC, 2020)

Whilst markets have been overly declining, extending bear sessions over weeks of trading which is unprecedented, the Chinese industrial production index was the lowest on record. The Jan-Feb session was recorded to be -15% in output, with a fall of 13.5% since the last period which in a hypothetical situation would normally take an industrial output decline over 5 consecutive years to reach. Given that China makes up a third of manufacturing globally and is the world’s largest exporter in goods and services, the supply chains of major multinationals and business have consequently taken a major financial blowback. Apple, who manufactures predominantly in China, saw almost a 19% fall in its share price wiping out more than $800 mn in market capitalisation in a short market session. (BBC, 2020) Volatility extends further in major countries, whose central banks have enforced unprecedented monetary policies, such as the Bank of England slashing rates to 0.1% (being the lowest ever) and the US Senate passing a $2 trn stimulus package. (WSJ, 2020) When one considers these drastic measures, the financial crisis comes to mind and particularly the advent of mass quantitative easing programmes to instil confidence back into markets. The financial crisis saw ultra-low interest rates in the region of 0.5 – 2% globally and have much remained in these ranges since then. (Financial Times, 2020)

Financial Sector Impact

The Financial Crisis was brought upon by the cheap loans offered to households by banks which lead to the burst of the housing bubble. The impact was bad because major multinational banking firms simply did not have enough capital to cover the shock, taking upon too much risk and leverage behind derivative-based assets, hence the bailout scenarios that happened. (Bloomberg, 2019) However, the stance on this background was enforced by stricter regulation and frequent stress testing that has allowed banks to stand stronger at weaker times. Possible bailout scenarios seem highly unlikely according to Bloomberg yet have noted that European banks are holding $497 billion worth of private Italian debt which experts are flagging given a possible sovereign debt default by Italy, given it is in lockdown. (DW, 2020)

Oil Industry Impact

According to Bloomberg, global oil markets are expected to have the biggest blow by the pandemic. Temporary bans on travel, factory production and shutdowns have caused oil prices to fall by almost 50% this year. (DW, 2020) Lower oil prices may be better for companies that use them, yet it implies that there are lower incentives to supply them; compounding problems in Saudi Arabia with Russia has only fuelled this decline, the effects being losses in income and laying-off workers. Experts reckon that the 2008 oil impact was much less severe than what is being seen now, with prices for oil cruising in the $30 range than the $60 range seen almost a decade ago. (WSJ, 2020)

Conclusion and Global Impacts

According to OECD estimates, the Coronavirus impact could cost the global economy close to $2 trn this year, assuming that the pandemic falters nearing the end of this year. (OECD, 2020) Experts from leading Macro group, Oxford Economics reckon that this pandemic represents more of a temporary shock, given that spending patterns will more than likely return to normal. The reason has been pointed towards the 2002 SARS VIRUS which saw an almost instantaneous rise to average consumer discretionary spending in 2 months. Whilst millions of jobs were lost and global consumer spending fell almost 2% in 2008, UN estimates point to a softer blow to the economy and rises to ‘normal spending levels’ in the foreseeable future even with ‘worse case scenario’ models.

Stay safe everyone.

By Shamsher Mann