Pandemic Impact

The pandemic impact on the economy is unfolding and it is a somber view where the worst-case scenario is most likely the real one with the global economy contracting by almost one quarter and 10s of millions unemployed.

Investors should brace themselves for an unprecedented 24% drop in second-quarter output this year, according to Goldman Sachs.

The pandemic impact made worse by enforced lockdowns has forced US unemployment claims to spiral to near 17 million in three months

In short, the current pandemic impact is worse, in terms of economic impact, than the 2005 World Bank forecast models of a global influenza pandemic.

Pandemic Impact

Back in 2005, a World Bank official predicted that a global influenza pandemic could potentially kill tens of millions of people and cause $800 billion in economic losses.

Moreover, the implications for a modern-day pandemic was also examined by the Federal Reserve Bank of St. Louis in a paper entitled, “Economic Effects of the 1918 Influenza Pandemic,” published in November 2007.

McKinsey & Company also researched what it referred to as a more severe COVID-19 pandemic. In their models city and suburban residents were required to significantly change their work habits and distance themselves socially for six to eight weeks. McKinsey’s research concluded that global GDP would be cut in half, to between 1% percent and 1.5%.

The current pandemic impact on the global economy makes the forecasts look rosy which is easy to comprehend, bearing in mind that nearly the entire developed world is now in lock-down.

From a macro stance, the pandemic impact will be to expand the growing public deficits

Last month, March 2020, US lawmakers agreed on the passage of a $2 trillion stimulus bill called the CARES (Coronavirus Aid, Relief, and Economic Security). It will be the largest single economic rescue plan in the history of the US, which entails ensuring food security, paid sick leave, expanded unemployment benefits and free Coronavirus Testing. The pandemic impact on monetary policy could be to the beginning of modern monetary theory (MMT) with its universal basic income (UBI), payments for everyone to ensure income for non-discretionary spending. Zero and negative interest rate policy (ZIRP and NIRP) designed to stimulate business investments is already being implemented by the major central banks. 

While the pandemic impact will usher in more fiscal spending, MMT and quantitative easing (QE) to infinity its impact could be limited

The central banks have implemented trillions of dollars of QE expanding a decade with limited results on the real economy. 

The European central bank has already implemented a ZIRP over a lengthy period with limited or no success. Moreover, Japan and several other countries have experimented with UBI, or helicopter money with mixed results. In times of economic uncertainty, people tend to save more than spend and so there is no certainty that UBI will have an immediate impact on spending. 

The pandemic impact on real estate is a headwind but to what extent is unclear since it has yet to be reflected in the real estate reports

But it comes as no surprise that JPMorgan is now quietly pulling out of that other market where it makes the bulk of its revenues, mortgages ahead of a tsunami of mortgage defaults. Up to 30% of all mortgages will default in the biggest wave of delinquencies in history. 

“We are hearing an increased number of situations with people either not being able to close or choosing not to close,” said a real estate broker.

The pandemic impact on landlord incomes is also likely to be negative as tenants renegotiate tenancy agreements

Challenging employment conditions is likely to keep rents down going forward. 

The secondary effects of the pandemic impact mean slower orders as social distancing reduces or in many cases halts social consumption

The closure of clubs, pubs, restaurants, concerts, sports games and nightclubs has shut down a large chunk on the service sector economy. In the age of automation the service sector entertainment economy pre-COVID-19 pandemic was growing and a large employer of people. So the pandemic impact on the psychology of consumption might not lead to pent up demand and thereby a V shape recovery when the lockdown is lifted. People will be worried about the next lockdown and build a rainy day fund. 

Pandemic impact on e-commerce has been huge and is emerging as a big winner 

Ecommerce sector was expected to grow by $6.5 trillion in 2023, the e-commerce sector was already booming. But since the outbreak, online shopping has surged. Pick your winners, think the digitalization of everything, think FANGS in the new world order investing.

The pandemic impact has created a pandemic economy

Consumer spending patterns have changed. Retail intelligence firm Stackline analyzed e-commerce sales across the U.S. and compiled a list of the fastest-growing and declining e-commerce categories (March 2020 vs. March 2019) with surprising results.

Vacation cancellations mean that the fastest declining categories have been

Suitcases -77%, Briefcases -77%. then Boy’s Athletic Shoes -59%, Cameras -64%, Gym Bags 57%.

Meanwhile, demand for pandemic pantry products has been buoyant.

Disposable gloves are up a massive 670%, bread machines 652%, cough, and colds 535% and soups 397% and weight training 307%.

Pandemic impact on investing could make investors think long term believing that it is better to stay the course. By selling off your holdings, you’re locking in losses, which means you won’t benefit from an eventual recovery.

The batten down the hatches and wait for the storm to pass is a strategy that sometimes wins. In the 2008 financial crisis, it took a few years for the market to rebound. After the stock market crash of 1929, it took 20 years for stocks to recover to their highs.

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