How COVID-19 pandemic will affect the economy

• Evolving pandemic is going to trigger economic recession in the US. Annual GDP may drop by 5-10% in 2020

• Surplus of liquid capital on the global markets will push US stock market back up soon. Similarly to 2008, macro-economic recovery will be relatively quick

• The recovery may cause positive structural changes in the economy if not undermined by redundant monetary measures

Coronavirus pandemic is hitting the world economy hard. Closing down industrial areas in China in February had caused logistical disruptions all over the globe. Due to available stocks of goods, world economies have not yet started to experience total shortages of merchandise. However, delivery of industrial equipment is already getting delayed.

Logistical collapse of the world economy is going to rapidly gain momentum over next months. Service based economy of the developed countries is highly dependent on the Asian supply chains, which are now being blocked by massive protective measures aimed at containing the pandemic. Growing shortage of goods will not only affect consumer markets, but may also paralyze infrastructure, telecommunications and transportation sector, subsequently undermining the whole sectors of economy.

Creating more or less accurate forecast of the upcoming economic distress appears to be next to impossible. Ramping up domestic manufacturing may be a challenging, but yet doable task for countries trying to substitute for the lack of international shipments. After all, the depth of the recession will depend on how long it will take for local economies to adapt to the de-globalization of the international supply chains.

Some industries happen to to be at the frontline of economic disaster:

- Events industry

- Hospitality

- Retail

- Transportation (airline companies first of all)

Businesses are incurring losses and are now starting to lay off personnel. Within weeks or months we may start seeing the wave of bankruptcies.

If the strict pandemic measures continue to take place for few months, adjacent industries will also get strongly affected:

- Property management

- Restaurants and food-service industry

- Construction

- Oil and gas

Further shocks will penetrate across the entire “consumer economy” causing

- Decline in car sales

- Real estate market drawdown

- Possible personal bankruptcies will affect the financial industry

Several months of economic disruption may affect up to 30% of businesses with direct impact on corporate profits and employees compensation (the latter - due to lay-offs, decrease payments to hourly employees and paycheck cuts). As a result, annual GDP may drop in 2020 by 5-10%.

Looming recession may trigger a series of structural changes in the economy. Some of those changes may have positive long term effect. For example, shortage of imported industrial goods supported by trade protection measures may result in import substitution in manufacturing. Structurally, this would be the best possible outcome of the recession.

On the other hand, similar to 2008 recession, government may expand its quantitive easing policies and will end up flooding economy with money. In this case, lack of purchasing capacity (both consumer and business) will be compensated with the affordable lending programs. As the result, structural distortions of the economy will reproduce at a larger scale.

Obviously, organic recovery of the economy will take longer, but will be more beneficial. Instead, quick recovery stimulated by monetary measures will result in the long term debt overhang and inflation.