Governments must act to stop Coronavirus causing financial crisis

09 March 2020 Consultancy.uk

As the number of patients infected continues to rise across the world, markets appear to be teetering on the brink of recession. According to a new report, governments need to act fast to encourage spending among both investors and consumers to avert a possible financial crisis.

The Coronavirus outbreak of 2019-20 has seen just under 100,000 people infected worldwide, leading to more than 3,000 deaths. The infectious disease causes most of those affected to develop a fever, dry cough, fatigue and shortness of breath – however, cases can progress to pneumonia and multi-organ failure in the most vulnerable.

The virus has spread too rapidly for the containment protocols of the 2003 Severe Acute Respiratory Syndrome (SARS) outbreak to have been effective – partially thanks to the increasingly globalised nature of modern business. While panic continues to spread around the immediate health-related crisis posed by Covid-19, its spread has subsequently also led to a rise in concerns that the global economy might be shunted into an imminent recession this year.

According research from international consultancy Sionic, as the global economy has become increasingly dependent on unfettered movement, the sudden lock-down many of the world’s leading markets are entering could see major financial disruption accompany the chaos caused by Coronavirus. Looking at previous similar outbreaks, the speed of transmission, Covid-19’s subsequent scale and it’s larger mortality rate all suggest that this is not an event markets will easily shrug off.

Immune - world epidemics and global stock market performance

Historically, the last 50 years saw a number of similar outbreaks, which have not necessarily impacted markets. Sionic particularly pointed out that the 2002-03 outbreak of SARS (also a strand of Coronavirus) saw stock markets broadly thrive. The S&P 500, for example, posted a gain of 14.59% based on the end of month performance for the index in April 2003, while 12 months later the market was up 20.76%. The potential threat of SARS was seen as catastrophic, but this fear alone was not enough to derail the market. Middle East Respiratory Syndrome (MERS) similarly preceded a 10% bounce, and a 12 month gain of almost 18%.

The problem is that while those outbreaks were also Coronavirus strands, they were relatively well-contained. Covid-19 has spread at such a rate that the number of worldwide cases has already far-surpassed SARS and MERS combined, in terms of both patients infected, and the number of deaths caused by it. The new outbreak currently stands at just under 100,000 patients, compared to the 15,090 people impacted by SARS and MERS – which killed a combined 1,632 of those infected, compared to around 3,000 mortalities from Covid-19.

Proportionally speaking, Covid-19 might be less deadly than its two predecessors then, but it has a much faster rate of transmission, meaning it has much more potential to infect vulnerable groups – such as the elderly and those with immune system disorders – while side-lining a sizeable portion of the workforce who will recover, but will take several weeks to do so. This could prove devastating for the global economy then, which has already seen growth stifled by a sustained period of uncertainty.

Corona impact on stock markets - Comparison betweet new coronavirus and similar outbreaks

In the UK, for example, the economy is already acknowledged to lose billions of pounds in productivity to employee illness. One of the worst-case scenarios currently being talked about for Covid-19 is that it could infect one-fifth of Britain’s workforce. With the nation already grappling with sluggish economic performance due to Brexit anxieties, this is something which would likely shunt Britain into a recession.

This might be why the US, UK and European markets have been more affected by Covid-19 anxiety than Asian ones. In particular the Shanghai index is relatively stable by comparison, having fallen by 6.6% as the US has plummeted by 10.7%, and the UK has tumbled by 13.2%. As mentioned, there are other factors at play in these markets – in Britain, there is still a lack of clarity about the country’s ability to trade with Europe following Brexit; while in the US the approaching Presidential Election continues to unnerve Wall Street – but ultimately this suggests that Covid-19 could end up being the straw that breaks the camel’s back.

The report’s author, Sionic Managing Partner Xavier Pujos, commented, “Covid-19 is already having a tremendous impact on markets, businesses and most of all, people. This new type of risk requires financial firms to act with wisdom, as well as agility to adjust their behaviours and client interactions, particularly as we are now entering a possibly prolonged situation. Firms need to consider a wide range of responses to business continuity, disaster recovery, payments, even simple access to cash.”

Government action

According to Sionic, the longer it takes to contain the virus, the more disruption there will be, as ultimately the markets crave reassurance. That does not mean governments need to concoct a cure or vaccine by next week. Instead, the report suggests reassuring traders with a “whatever it takes” approach, while doubling down on the measures usually deployed in order to encourage investment.

As the pricing of financial assets reflect an anticipation of the future, first and foremost Sionic contends that their volatility can be offset via tax cuts. In order to stop a slump in commercial activity, the study suggested governments could deploy tax holidays or reductions in payroll, sales, and value-added taxes. Meanwhile, Sionic’s paper suggests that providing purchasing power to middle and low-income households – the groups which spend the largest portion of their regular income – can stimulate economic activity. Indeed, a failure to do this convincingly in the last decade has seen the retail sector enter a state of terminal decline.

At the same time, governments are encouraged to boost medical spending, particularly with the aim of protecting the most at-risk segments of the population: the elderly, the ill, the poor, the excluded and marginalised. Countries reluctant to intervene in the market in such a way are likely to feel the worst effects of Covid-19, as is already being seen in the US. The country’s state mechanisms are almost entirely devoted to preserve the ideological position of marketised healthcare, however this has seen the US has shown the worst ratio in death to declared cases anywhere – an estimate 7% – more than double China’s ratio.

Finally, governments could stem the spread of the virus by adopting fast-tracked legislation to provide the workforce temporary relief via social security. Such benefits could take care of people being laid off as a result of activity or business slowdown, while decreasing people’s need to show up at work no matter the risk of spreading Covid-19. At the same time, this would translate into putting cash in the hands of those who are most in need over the short term – and as mentioned, this will help stimulate spending until the epidemic subsides.


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