A depression, really? Some of you might be thinking that the coronavirus could not possibly trigger a depression, considering we have not even entered a recession yet. While we would like to see the world through the lens of a positive economic outlook, we must consider other standpoints and keep a balanced approach. Especially when our global markets are in free fall, businesses are coming to a screeching halt , and the number of coronavirus cases and deaths is approaching 500,000 and 20,000 respectively
Features of a Depression
We have all heard of the Great Depression, the most severe economic downturn in human history. Flashback to 1929, well most of us cannot because it is a time when our grandparents and great grand-parents were alive. It all started when the U.S stock market crashed in 1929 on ‘Black Thursday’. Soon after unemployment rose to catastrophic levels, worldwide poverty grew exponentially, and consumer confidence crashed to all-time lows.
I’m sure after hearing what the GD was like, none of us want to even imagine what our great grandparents had to live through. However, you might be wondering what is a depression, what are the causes and are there any signs of a potential depression?
In a nutshell, a depression is when:
1) GDP drops by 10%+ or
2) A recession lasts for 2 or more years
Causes of a Depression
1) Stock market crash = (Sharp decline in stock prices)
2) Deflation = (Low prices might appear attractive on face value = BUT in reality, G&S are cheap because of extremely low demand)
3) Loss in consumer confidence = (We spend less = significantly lowering demand for G&S)
4) Decrease in manufacturing = (business production comes to a screeching halt)
5) Oil price increases = (Purchasing power decreases = decline in demand)
Signs of a Depression
1) Worsening unemployment rate = (People lose purchasing power = lower demand for goods = deflation)
2) Rising inflation = (If inflation gets higher enough people don’t spend = demand for G&S drops)
3) Increasing number of people default = (Interesting to see if After pay and Zip defaults rise over the next few months)
4) Declining property sales = (A strong downward decline in property sales screams a lack of confidence in the economy)
5) Food and Good shortages = (Businesses are forced to lay off staff = causing a domino effect)
How does the coronavirus match up?
1) Stock market crash
While governments around the world attempt to contain the virus, develop a vaccine and keep the economy afloat it appears their efforts are ineffective. The coronavirus fear is wiping out any confidence behind the market causing some of the world’s biggest stock exchanges (as well as the ASX) to plummet.
2) Unemployment rates
The current unemployment rates (February 2020) for the US and Australia are 3.5% and 5.1% respectively. In comparison, to the last few years February’s unemployment rates are not concerning. However, the unemployment rate for March should surge. Because, the coronavirus has only started triggering large-scale layoffs over the past 25 days. So, for now unemployment is not worrying but in 7 days it could be.
3) Food shortages
If you have visited your local supermarket recently then you know what I am about to say. We are experiencing the full effects of panic buying as our staple food products are stripped bare from the shelves. To add insult to injury, with the media constantly suffocating us with fear the likelihood of panic buying being a thing of the past is very unlikely.
If supermarkets are already scrambling to keep up with demand what will happen when vital people in these supply chains contract the virus?
For, example what happens if truck travel became banned or truck drivers contracted the virus? It might sound absurd but think about for a minute. Industries like healthcare, manufacturing, waste removal and of course food would be brought to its knees.
4) Reliance on China
Without a doubt, China Is like a drug that the world depends on. Firstly, most companies outsource their manufacturing to China. Meaning any disruption to business production will instantly impact Small to Medium businesses (SMEs) who don’t hold large amounts of inventory. Consequently, businesses will lay-off employees to survive and the unemployment domino effect begins.
Moreover, most economies depend on China for foreign investment. For example, China owns a significant amount of real estate within Canada, the US and England. Thus, if the Chinese economy begins to tumble, they liquidate their assets potentially causing a decline in property prices.
Could the stimulus packages save us ?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
The real question is not whether a recession or depression will happen. Instead, its whether our world leaders can devise an effective solution that prevents a recession or depression?
So far, we have seen governments create stimulus packages, Quantitative Easing (QE), and the federal banks reduce its cash rate to 0.25% (AUS) and 0%(US). However, are these tried solutions working?
Historically and theoretically they do but currently, coronavirus cases and deaths are surging, food shortages are skyrocketing, and GDP is declining as businesses are ‘stuck in the mud’. It seems the governments attempt to flood the markets with liquidity (water) will not put out the fire.
Now, some of you may say but the recent US stimulus package is restoring confidence in the stock market. Especially, as the DOW Jones, NASDAQ and NYSE all surged yesterday. However, I would say, the stimulus package is more of a band-aid effect as seen with the Scott Morrisons stimulus. This week and next week should demonstrate if investor confidence is really restored and if not, then the recovery has just been another false reversal.
Personally, the underlying confidence in the market will not be restored until a vaccine is developed, the death rate and case rate are significantly reduced, and industries goes back to ‘business as usual’.
I think we call it a day here, as we could talk about a possible recession or depression until the cows come home. I thank anyone who has read this far. Because this was definitely one jam-packed article. However, if you did then your understanding of the implications of the coronavirus on a world wide scale should be clearer.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Associate of YIG.