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Tuesday, April 07, 2020
COVID-19 HITS WORLD ECONOMY

Wall Street disaster, Asian financial crisis and Sars crisis can't be compared with the global depression about to occur

WITH the spread of Covid-19, lockdown measures have been ongoing in a number of countries. Poland has taken drastic measures by shutting down its roads and cutting off its frequently used highway network connecting it to Europe.

The US and Europe, and most of Asia, have imposed measures and closed their borders to foreign nationals.

These measures are all unprecedented. Such actions have paralysed the world and caused the global economic situation to change dramatically. Every day we see new developments regarding the situation.

In the US, many are frightened by the turmoil on Wall Street. At first, it was thought the market would return to normal the day after the crash. After the Federal Reserve's intervention, people became even more optimistic that there would not be a financial crisis.

It wasn't until after successive slumps that people realised things were turning ugly.

Suddenly, the US stock market fell by one-third, and global liquidity tightened. The US dollar exchange rate has been continually hitting new heights.

To curb the spread of Covid-19, the US government has ordered millions of workers, students, and consumers to stay inside, which has resulted in a surge of unemployment claims across the US.

In Ohio, more than 48 000 people applied for jobless benefits in the first two days of the week. In the same period last week, there were only 1 825 people. In Pennsylvania, about 70 000 people sought unemployment assistance in one day, which was six times the previous week.

As more people apply for jobless benefit cheques, a new problem arises. Treasuries in the US states are in a state of collapse.

The economic stimulus package proposed by the Trump administration may be close to $1 trillion, including issuing cheques to Americans within weeks to help them pay for groceries, bills, mortgages and rent.

The Senate approved another bill on March 18 that would inject US $1 billion into the state unemployment insurance plan.

However, efforts of this size might not be able to solve the problem. The last recession caused the unemployment trust funds of 35 states to go bankrupt.

To pay the wages of unemployed workers, these states had to bear more than $40bn in debt.

Goldman Sachs estimated that to initially resolve the problems in the US, trillions of dollars would be needed.

As of now, the US federal government's assistance will almost certainly exceed the "Great Recession" of 2008.

As for the future US economy, more and more economists believe the US may enter, or has already entered, its first recession since 2008.

The actual deterioration of the global economy will not be solely felt by the US. China, like the US, is the world's largest economy, and also faces the impact of the viral outbreak.

The impact of the Covid-19 outbreak has been far more severe in China than in the US.

Despite China and the US having different economic structures, industries, levels of wealth and living standards, the macro scale of the impact on the American economy can still be compared with that of China. If the US needs trillions of dollars to put its economy on a sounder footing, China's needs shouldn't be much different.

China's economy as a whole is still on a downward trajectory. From 2013 to 2019, China's economic growth rate over the years were 7.7%, 7.3%, 6.9%, 6.7%, 6.5% and 6.1%, respectively. Even under "new normal" circumstances, the economy has continued to slide.

Such a situation is far from comparable to the economic resilience during the Sars outbreak in 2003. Although the Chinese economy was greatly affected by the outbreak, the economy was taking off at that time, and investments, consumption and exports were doing well. There was no big problem in the world market. With the support of external demand, and the continual transfusion of foreign funds, China was able to recover quickly, and the economic growth rate of the whole year still reached 10% in the end.

In the field of government finance, the central government has already had a budget deficit, and now it is even worse. The finances of local governments are also difficult. In 2019, the fiscal deficit of first-tier cities such as Beijing and Shanghai were respectively RMB 102.3 billion and RMB 40.8 billion.

China made concessions in its trade war with the US to preserve its overseas markets and maintain its current economic growth, but now that the outbreak has occurred, even without a trade war, its overseas markets have fallen.

The Chinese overseas export of much-needed products such as masks and ventilators cannot solve the problem, let alone the fact that China needs them for its own use. Therefore, such products cannot be effectively exported, and maintain China's export market share.

Just like the situation in China, Asian European countries have little room for optimism. The number of cases of the virus has been rapidly increasing.

Forced by the situation, and facing condemnation from many, the blockades between European countries have basically been fully implemented. The tide of unemployment and bankruptcy is emerging, and the economy and markets are on the verge of collapse.

Facing the epidemic situation, under the tremendous pressure of public opinion, every country has implemented extreme measures.

In these six months, the population of 1 billion people in the developed markets will stay at home; 850million students have been suspended from school, and the world economy will be essentially stalled.

Obviously, countries around the world have greatly underestimated the impact of the pandemic.

If this situation can still produce good results, and the world economic order returns to normal, it will simply be a miracle. Of course, we do hope that miracles will happen, and the virus might gradually disappear, but it is probable there will not be a miracle for the economy, which means the greatest depression after World War II will probably occur.

China might still blame countries for not taking drastic measures and failing to do a good job to prevent and control the outbreak of the virus. However, it will soon be forced to require those countries to open their boundaries and restore and stabilise economic order.

No one can afford to drag on like this because all economies will start to collapse. What is worse is that the authorities in the global medical community do not dare to guarantee that this virus will not make a comeback. This alone means the world is in a deep environmental crisis.

The Wall Street stock disaster in 1987, the Asian financial crisis in 1997 and the Sars crisis in 2008 cannot be compared with the global depression about to occur. This is the biggest postwar depression.

Source from: https://www.pressreader.com/article/281500753365571

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