Coronavirus: Economists Predict Recession, Governments and Banks React

It’s unprecedented! Stores, restaurants, airlines, factories, and other businesses continue to shut down around the world due to the novel coronavirus pandemic. That’s why economists now believe that we are entering a global recession, according to CNN. Notably, a recession occurs when the GDP declines for two consecutive quarters. Here’s some background on why this new coronavirus is wreaking havoc, how the world economy is faring, and what governments and banks are doing to fix the virus’s negative economic consequences.

Background on the Coronavirus

According to the U.S. Centers for Disease Control and Prevention (CDC), the novel coronavirus, also called COVID-19, is a respiratory pandemic posing a severe risk to public health. Although the risk of exposure was still thought to be low for most Americans as of the CDC’s March 18 situation summary, that risk will increase as the CDC anticipates “widespread transmission of COVID-19 in the United States.” In addition, as of March 18, three states were experiencing sustained community spread, which means that new cases of the virus continue to appear even when the source of exposure is not known. Increased sustained community spread could overwhelm hospitals, as it already has in Italy in recent weeks. Therefore, the CDC recommends quarantines and other so-called “nonpharmaceutical interventions.” Of course, this situation is updating on a daily basis please visit the CDC website for new information.

Predictions for a Recession

CNN reported that the Chinese economy plummeted in January and February during the country’s COVID-19 lockdown. According to the National Bureau of Statistics, compared to last year, retail sales were down 20.5%, fixed asset investment went down by almost 25%, and industrial output fell 13.5%.

These sharp production declines are the worst on record. In the U.S., compared to record highs from not too long ago, U.S. stocks were down 27%, according to the CNN report. In addition, due to supply chain disruptions, quarantines, and spending decreases, Goldman Sachs has downgraded its GDP outlook. The investment bank also predicted that the U.S. economy will shrink by 5% in the second quarter, after 0% growth between January and March, whereas ING predicted an 8% shrinkage. Annual growth is forecasted to be 0.4%, down from 1.2%. Furthermore, it has become more difficult for buyers and sellers to price assets in an extremely volatile market. CNN indicated that borrowing money may become more difficult as well, especially as domestic and international investors see their declining portfolios.

Keeping the Economy Afloat

People in power around the world are grappling with the present and future effects of the novel coronavirus on business. For example, on March 15, the U.S. Federal Reserve cut the benchmark interest rate to zero and announced a purchase of $700 billion or more of mortgage-related and government bonds, according to The Washington Post. It will also be lending money to banks nationwide. On March 20, responding to major selloffs of municipal debt, the Fed announced that it would lend money to financial institutions, secured by “high quality” municipal and state bonds. President Trump has called for the Fed to go even further, making interest rates negative.

The U.S. Legislative Response

As reported by a Forbes senior contributor, a new U.S. law, the Families First Coronavirus Response Act, now requires governments, along with small and mid-sized businesses, to provide paid sick and family leave to all employees impacted by COVID-19, with some exceptions. This Act includes up to 12 weeks of paid leave to care for children during school closures and up to two weeks leave for those awaiting diagnosis, testing positive, under quarantine, or caring for family members. Even workers in the gig economy are included in this new bipartisan legislation. The payments will be reimbursed in payroll tax credits.

In addition, according to a Washington Post roundup, a $1 trillion USD stimulus package is in the works in the U.S. If passed, it will offset some of the economic losses that small businesses and airlines face, among others. Furthermore, on March 20, U.S. Treasury Secretary Steven Mnuchin announced that, under President Trump’s direction, the IRS will move Tax Day to July 15, giving individuals more time to file without penalty.

Meanwhile, the European Central Bank initiated an $820 billion USD emergency bond-buying program on March 19. Although that did not stop Europe’s STOXX 600 index from falling, even after an initial rise earlier that day. France promised that “no company will be allowed to fail.” Germany is guaranteeing €500 billion loans and unlimited liquidity. Spain passed a €200 billion rescue package. The United Kingdom will back £330 billion worth of loans. This comes on the heels of all manufacturing sectors in Europe grinding to a halt, according to CNN.

While the traditional stock exchange is experiencing volatility caused by coronavirus fears, as well as extreme travel and business restrictions, alternative investment choices may be wise to diversify investments. When it comes to cryptocurrency securities and other private placement offerings, both domestic and international accredited investors have more options than other investors. Regulation D of the Securities Act contains special exemptions to the Securities and Exchange Commission (SEC) registration requirements. For example, Rule 506(c) permits broad advertising of tokenized offerings and other private placement options, as long as only accredited investors participate.