How will the coronavirus affect the world Economy?The Biggest Covid-19 Challenge - Soft Tech LTD.

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Sunday, 19 April 2020

How will the coronavirus affect the world Economy?The Biggest Covid-19 Challenge

How will the coronavirus affect the world Economy?The Biggest Covid-19 Challenge

 



I don’t think we have even begun to see the impact of the economic effects of the Coronavirus and they will only grow as time goes on.
The supply chain beginning in China has been temporarily disrupted. Those impacts, which began in February, will take about three months to be felt here in the US. That puts the first pain in May, even if the virus disappears by then. For somethings, like washing machines and furniture, it may not be so incredibly bad as those purchases are non-perishable. But if you are a store that sells “N” units of those products and you can no longer get them, then you’re next step is to cut back on labor you don’t need to sell, deliver, install and maintenance the product. And that’s just for non-critical items.
Now we are seeing all kinds of sporting events and gatherings cancelled. This was perhaps my biggest surprise, when I heard the NBA season was cancelled. I am no arguing the necessity, just the impacts. The average NBA game generates between 6 and 8 million dollars for the teams but this does not count the money made by concessionairs, parking valets, nearby bars and restaurants, gas stations, and so forth. By any measure, this amount could easily be equal to the amount made by the game itself, but for different peoples. Many establishments survive because of “game night”. What happens when there is no more “game night”? All those retailers and service providers get less money; they buy less beer and spirits and foods; even the laundry services who wash the tablecloths in restaurants get less business. Every facet of the service industry that benefits from a “home game” is negatively impacted.
Consider the closing of Disney World in Florida. The entire area around Orlando is doubtless counting on the tack-on revenue from that amusements park, from souvenir sales to hotel rooms to parasailing to booze to airline tickets and food and so on. What happens when that stops coming? First of all, it’s hard to stop all the ‘just-in-time’ shipments; someone has to eat that, so not only is revenue lost but alot of food will just go bad; there may be stockpiles of booze and other goods that cannot be stored and returned to the vendor who must carry it. But the seller who loses revenue, especially in restaurants which operate on low margins, could be the death knell. It certainly will cause closures; it will absolutely mean the firing of service people like waiters and bar backs and heavy lifters and so forth. You can’t keep people on if there is no revenue coming in and Labor is almost always your Number One Expense. How do you keep paying the rent on your restaurant in the tony part of the city near the stadium if no one buys your overpriced steak and beer?
After Hurricane Sandy, NYC estimated damage at 20 billion dollars of which 10 billion was just “lost business”, that is, lost sales. And that crisis ended in less than a week. How much will businesses suffer by schools being closed, businesses closed, entertainment venues closed for weeks on end? While some people predict this is a six-week venture at most, it’s likely that the virus will just be reaching its peak in six weeks, not dissipating. The more people stay home, afraid of contracting the virus, the more businesses will go belly-up from lost sales; the more people will be laid off; the more the economic engine slows. We have many empty ships sitting in San Diego with no cargoes to or from Asia. The last time we saw this was in 2008. The US economy was already on the precipice before the Corona virus hit; the Cass Freight Index showed that transcontinental shipments of goods was down almost 10 percent versus the previous year. Since the virus, Fedex and UPS have suffered extreme slowdowns in shipments and at an increasing pace.
The problem will be further exacerbated even when the impacts of the virus pass because there will be a bottleneck in transport and delivery; the US was already nearing capacity on intermodal and truck transport of goods. There is already a massive shortage of transcontinental truck drivers to deliver goods and air freight will not only be limited but exorbitantly expensive. We should expect shortages of everything that sources a component from far away, like Asia, at least through the summer.
So even if the virus passes us by tomorrow, we could expect supply chain disruptions and shortages, price hikes and higher unemployment through the summer. The result will be especially felt in the government sector which recently cut interest rates to almost zero and will be pumping up the deficits astronomically to cover the costs of lost business, unemployment and disaster assistance. And this assumes no other impact from hurricanes, fires or other expensive large-scale events do not occur. How long can the US government continue to prop up spending and run 1 - 2 or even 3 trillion dollar deficits?
The only conclusion that can be made is that a recession is coming, a major recession and it may bring enormous pain and suffering, even more so than the 2008 recession because even then people could scramble. Now they are forced to stay in their homes and watch re-runs because there will be no broadcast live entertainment. Perhaps Amazon will be a beneficiary of the virus since people will ramp up ordering online. In the long run, this can only mean further pain for brick-and-mortar businesses. We need to buckle in because it’s going to be a rough Christmas season in the US. If we’re lucky. If not, it will be catastrophic.

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