A novel coronavirus believed to have originated in Wuhan, China has grown into a full-scale pandemic over recent months. In addition to China, hotspots have been growing in South Korea, Iran, Italy, and the United States, in addition to dozens of other countries which are now reporting infections.
From an economic perspective, what COVID-19 crisis represents is an unusual supply and demand shock on the world economy. In addition, the ballooning of corporate debt over the past few years, the recent breakdown of oil cartel cooperation, and what is possibly the world’s largest natural experiment in working remote add a variety of interrelated factors that herald unprecedented changes to come for what has already been a very interesting start to this decade.
The Corporate Debt Bubble
In the United States, corporate debt is around $10 trillion, or close to 50% of GDP. Thanks to a period of very low interest rates following the Great Recession, companies have binged on cheap debt, and in doing so exposed themselves to more risk during the next downturn.
If a company is unable to meet its debt obligations, it may lay off workers, reduce purchases, and enter bankruptcy proceedings to discharge some of its debt. No matter the action, the end result is a negative consequence with the potential to domino across the economy.
As of March 15th, 2020, the Federal Reserve has lowered the federal funds rate to 0.00%-0.25% (the lowest level since the Great Recession), so borrowing remains very cheap. Whether this alleviates debt pressures short-term, allows firms to glide to a more manageable debt load long-term, or fails to help either the present or the future economy remains to be seen.
Collapsing Cartel Collusion
Saudi Arabia and Russia are pumping out more oil in a time when demand is expected to significantly slow from COVID-19. The logical conclusion of both less demand for oil and greater supply of it is lower prices across the board, which will hurt both countries’ economies.
In general, the large oil-producing nations have restricted their output to ensure higher prices overall, an agreement commonly known as a “cartel”. Recently, the biggest cartel, OPEC, and one of the big oil producers, Russia, had their pact fall apart, first sparked by Russia’s announcement that it would ramp up production even as demand falls. In a typical “tit for tat” move, other oil producers are moving to do the same, hurting their profits even more.
Since COVID-19 is leading many consumers to reduce their personal transportation overall, lower gas prices will likely have a muted effect for consumption. Airlines may benefit from lower costs now, but again, with overall reduced capacity and many flight cancellations, the lower gas prices may not bolster nor encourage significantly more usage.
Working From Home
Straining capacity of popular services (like Zoom), will likely shape the next decade of work choices (if things go well will lead to more wfh flexibility, if managers can’t get things done as well it will lead to more fears about giving workers flexibility).
I’m also curious to see the health economics side of things. Although COVID-19 may complicate overall statistics, there are a ton of natural economic experiments being set up for cleaner air quality (fewer cars, fewer planes) and both the physical and mental health effects of working from home.
Keep in mind also that the choice of working from home further exposes the different facets of the economy: there are a lot of people out there whose jobs absolutely require their physical presence (janitor, lab technician, firefighter, chef, doctor). These people face greater exposure in their jobs, simultaneously increasing their personal risk of infection and of infecting others when they can’t take sick days (either by policy, by workplace demands, or from lack of paid sick days).
All of the above are different facets going on, but they ultimately tie in with the big event of 2020: the novel coronavirus pandemic.
Starting in late 2019, a novel coronavirus quickly began to spread through the population in China. A few months later, “COVID-19” has officially been declared a pandemic, with a unique combination of virulence and mortality that appears to create asymptomatic carriers who help unknowingly spread the disease. China’s factories ground to a halt for a few months, and by March 2020 the epicenter has moved west (with Italy currently the hardest hit in terms of overall mortality). Within the United States, lack of preparedness and availability of test kits has led to more severe measures at the local level, including “shelter in place” orders in several major metropolitan counties, in the hopes of “flattening the curve” and not overburdening the healthcare system.
I’ll note that many people are referring to this event as a “black swan” (Sequoia, most notably). I personally dislike the notion of a black swan event — one that comes as a complete surprise, and “couldn’t have been foreseen/planned for”. That which we call black swans are almost always probabilities that were left unaccounted for by arrogance or misunderstanding, and this pandemic is no different. Given the trend of previous health crises over the millennia (HIV/AIDS, SARS, MERS, Ebola, and H1N1 “swine flu” were in the past few decades alone), the risk of a pandemic is something that should be weighed as a distinct probability with potential consequences, even if the probability’s weight itself is quite small relative to other possibilities.
Regardless of its classification, it is undeniable that COVID-19 has driven both a demand and supply shock in the world economy. Travel, hospitality, and any industry that involves broader socialization has taken a major hit. Even though the oil price war would normally encourage more travel due to cheaper gasoline prices, consumers are not in a position to take advantage of this (very good for the environment, bad for overall consumption patterns).
On the other hand, several industries are poised to benefit handsomely. Pharmaceutical companies are working overtime to create a vaccine or a cure, with several trials underway. Technologies that aid remote work (Zoom has been gaining a lot of publicity nowadays due to its current prominence on the videoconferencing scene) are growing as companies and universities seek avenues to continue necessary interactions. At least in the short term, grocery stores are benefitting as well, with customers flocking to purchase foods with longer shelf lives and toilet paper out of fear of supply chains getting cut off.
Overall, COVID-19 presents a unique global challenge, and may very well trigger a global recession. Reduced demand across many domestic labor-intensive industries, coupled with reduced supply from major production regions across the world, do not bode well for the global economy. On the brighter side of things, this situation also presents a unique look at remote work models, cleaner environments, and the capability of humanity when we can unite against a common enemy.