The virus of an (un)announced recession

by Cristina Pastia Monday, 2 March 2020
Discussions and analyses on the effects of the coronavirus on the (global or local) economy make the headlines in almost all means of information. There are “red flags” and scenarios that start in a “moderate” tone and get, not in a few cases, to “catastrophic”.
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<p>As a recommendation, eliminate the extremes and try to inform yourselves only from sources that mention from the beginning that “it is early to anticipate the exact effect of Covid 19 on the economy”. Experts are not mentioning in vain that there are two tendencies we must be extremely careful about: the epidemic in itself and the infodemic, this meaning the avalanche of fake news.</p><p>Why is it so hard to give a verdict in this stage of the “crisis” caused by the new coronavirus? Because the economies of the world are strongly interconnected. The trade, the dependence on resources, including human, got to the point in which it is hard to analyse each of them, country by country. Moreover, there are complex international ties that focus on long-term projections from the economy of each country involved. And not last, because, in general, entrepreneurs and their employees really need a genius psychiatrist rather than an outstanding economist.</p><p>&nbsp;</p><p><strong>What is happening in the epicentre?</strong></p><p>Let’s start with China, apparently the most affected country. In 2019, China had importations of 1.700 billion dollars and exportations of 2.500 billion dollars. There is almost no country in the world that does not depend on the Chinese force- from rare lands to products that are cheap, but priceless when it comes to social policies.</p><p>The prolonged “vacation” in the centre of the country affected important industries on the short term- high technology, auto, trade, tourism. Other regions in China suffered indirectly, especially due to travelling restrictions or running out of prime materials.</p><p>Even in these conditions, experts from the IMF hope that, in 2020, China’s economy will grow with 5,6%, just a little under the initial estimation of 6%.</p><p>&nbsp;</p><p><strong>The IMF, worried for a trimester</strong></p><p>In January the IMF had big plans- it anticipated that the global economy will grow from +2,9% last year to +3,3% this year. The emergence of the COVID 19 virus diminished their optimism a little and now they are talking about an economic growth of “only” 3,3%. And the ones in the IMF hope that the negative effects will decline in the first trimester of the year.</p><p><br><strong>THE “COVID 19” EFFECT ON THE GLOBAL ECONOMY</strong></p><ul><li>GDP: -1.000 bil. USD</li><li>Market capitalisation: -3.000 bil. USD</li><li>Car sales: -2,5%</li><li>Tourism: -30%</li></ul><p>&nbsp;</p><p><strong>The European bill</strong></p><p>In the case of Italy, the most affected country in Europe, the tendencies are still unclear. Of course, we are talking about regions in Northern Italy, the most industrialised part of the peninsula. If we also take into consideration that the tourism industry generates Italy almost 15% of its GDP, the concern seems to be justified. The Government in Rome ensures everybody that it has the necessary resources to compensate for the eventual damage.</p><p>Germany is the next on the “black list”. Most of this country’s profit in its relationship with China is given by the auto industry. American specialists estimate, however, that car sales will drop, on a global level, with at least 2,5%. Besides, in February, 80% less cars than in an ordinary month were sold in China. Tourism is not to be overlooked either, Chinese tourists spend annually 8 billion euro in Germany. In the new conditions, optimistic estimations indicate a decrease of this sum with at least 40%.</p><p>And the range of affected states could continue with France, Austria, Spain or Great Britain. Almost each of the 50 countries struck by Covid 19 (at the moment of the making of this material) can account for/anticipate/invoke a smaller or bigger decrease of the GDP.</p><p>On the other hand, stock markets all around the world reacted more or less viscerally and the indexes dropped consistently these last days. For example, at the beginning of this week, the pan-European index STOXX 600 finished in a decline of 1,8%. The capitalisation of the STOXX dropped with almost 700 billion dollars. The German index DAX decreased by 1,88%, while the Italian index FTSE MIB decreased by 1,4% due to informations regarding travelling restrictions in Italy.</p><p><br><strong>GOLD, A CRISIS “CURRENCY”</strong></p><ul><li>Quotation gold: +2,6%</li><li>Quotation oil: -3,4%</li></ul><p>&nbsp;</p><p><strong>What can get “infected” in the Romanian economy?</strong></p><p>Unfortunately for us, an eventual “infection” would affect a “patient” with severe chronical diseases- corruption, incompetence with a big evolution to “insufficiency” when it comes to any kind of infrastructure, tax “heart failure” or “energetic blockages”.</p><p>Romania’s GDP ranges between 180 and 210 billion euro. It depends who you ask. The sum is relatively small compared to other states in the Union, especially if we divide it per inhabitant. So we need to mention from the start that any loss in an economy like ours matters enormously.</p><p>Let’s talk about our commercial relationship with China. The trade with this country amounts to 5,5% billion euro. And even if importations from China represent 6% of the national overall, the Asian state is in the “top 5” freight providers.</p><p>However, if we talk about our relationship with Italy, we can identify a vulnerability of a different magnitude. Romania delivers especially machines and electric equipment, clothes and shoes, cars and auto parts to the peninsula. From there, we import cauldrons, turbines, engines, machines and electric equipment, raw skin and leather, plastic materials. The trade amounts to approximately 18 billion euro in 2018, important if compared to the overall trade, of approximately 150 billion euro.</p><p>And we get to Germany. God forbid that Europe’s “locomotive” stumbles. For example, that car sales in China drop dramatically. And that is because economic relationships between Germany and Romania are extremely important to us: 20% of Romania’s external trade, over 32 billion euro.</p><p>As a consequence, for Romania, a state in which everything hangs by a string, any important decrease of exports could mean, for example, recession in the auto and auto parts industry. Or, even if we are not a force in the European tourism, by cancelling vacations, we can give a negative push to transportations, tour operators or to the entrepreneurs in the domain. But not last, the impossibility to “import” work force from Asia will deepen the acute crisis in the HR domain even more.</p><p>&nbsp;</p><p><strong>Provisional… certitudes</strong></p><p><br>As a conclusion, no matter how much of an expert you are, it is hard to quantify the negative effects of a coronavirus Covid 19 pandemic/epidemic. New elements, new effects emerge everyday in the global economy and financial markets react, literally, to the most trivial sneeze. The recommendation is clear: a lot of calm, analysis power and decision making based on opportunity and projections in the future.</p><p>So far, besides the mere numbers at this hour- 3.000 deaths in 80.000 infected- we have no certainties. Maybe the high temperatures in April-May and the increase of the UV radiations intensity will end the epidemic/pandemic. And in the second part of the second trimester we will be able to talk about “recovery”. Or maybe this will not happen. In this case, though, we should have already talked about reactions. Not about prevention/healing (it is too late) but about compensation.</p><p>&nbsp;</p><p>(an article by Edward Pastia)</p>