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New Economic Crisis. What is Going On, and What to Expect?

In the last few months, we as a world have witnessed many devastating events. Natural disasters, worsening of conflicts in the Middle East, the COVID-19 pandemic and the failure of the OPEC + deal, resulting in oil futures prices falling below $0 per barrel, for the first time in history.
Even individually, each of these factors could cause extensive damage to the global economy, whereas dropping together on the global market, all these problems created a “perfect storm.”

What happened?

The business sensed the influence of coronavirus before it spread outside of China. Robert Koopman, the chief economist at the World Trade Organization, emphasized that modern capitalism has become more mobile and integrated. Financial markets are closely related. If a crisis begins in Asia, its effect will immediately be felt on the other side of the world .
In the case of the COVID-19 epidemic in China, not only stock quotes but also industrial production were hit. The Chinese links in global supply chains have been blocked, paralyzing the work of enterprises around the world. When the virus spread to other countries and became pandemic, markets began to crumble.

Not just COVID-19

The ensuing failure of OPEC’s negotiations with Russia to reduce oil production not only intensified the panic but transferred the work of exchanges to the “sell everything” mode. Over the past couple of weeks, the S & P500 and Dow Jones have already experienced some of the worst days in their history since Black Monday 1987. On March 16, trading automatically stopped for the third time since the beginning of the month .
In 1987, an incredibly rapid fall was followed by stabilization and growth. The current decline has been going on for a month, and despite stabilizing measures we can only see an even greater reduction in base interest rates and allocation of funds by international financial institutions to support national economies.
Increasingly depressing news about the closure of borders and the restriction of the movement of citizens around the world each time cause a new wave of panic in the markets. And we should not expect the end of the crisis shortly.

When everything is going to get resolved?

There are already several zones of the increased spread of the virus in the world, and therefore measures to contain it will be tightened. Even successfully besting the pandemic will not lead to instant economic recovery . Damage from the shutdown of enterprises around the world will reduce the growth of world GDP by 3% year - and this is still an optimistic forecast.
The situation is further aggravated by the fact that no one can name the exact dates when the world can return to normal life. China is gradually repealing all restrictive measures, but the possibility of a new outbreak in the country is still there. Trump does not rule out that a pandemic could last until the end of summer . Postponing of the majority of mass events will also affect financial performance in many market segments.
International financial institutions and national governments will move to active measures to restore the economy and overcome the crisis after returning to normal life - with air traffic and international trade.
The most common crisis management tools — refinancing and renegotiating debt, repurchasing troubled banking assets, and allocating substantial amounts of money to support people and businesses may not work.

What is waiting for us in the future?

An even greater decrease in interest rates will lead to their transition to negative values ​​and increase inflation. And the emergence of a significant amount of money supply, in the absence of conditions for growth in demand, can lead to a rapid depreciation of currencies .
Yet, we must understand that the consequences of the coronavirus and the current global recession for the global economy will be felt longer than the results of the financial crisis of 2008-2009 . Protectionist trends will intensify in the world, the revision of monetary and fiscal incentives will begin, the development of remote forms of employment and education will lead to a drop in the income of some industries (development, air transportation, hotel business), a wave of bankruptcies of numerous startups and energy projects is expected.
Most likely, the pace of global economic recovery will be lower than what we saw in the early 2010s. Investors will be less willing to return to the markets, which will be associated with a change in consumer behavioral patterns towards greater caution and limit excess consumption.


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