The world economy is confronting one of the most existential challenges since World War II. Economic activity, financial markets, and private sector confidence are all collapsing. The latest update of the Brookings-Financial Times Tiger index (Tracking Indexes for the Global Economic Recovery), based on the most recent available data and estimates of real-time data, shows only the tip of the iceberg of this collapse and indicates that much worse is to come.
The coronavirus outbreak, which has put the global economy under a lockdown, is being compared to the 2008-09 downturn. While many are already comparing the current crisis to the 2008-09 recession, most experts do not expect it to be as bleak and are forecasting the global economy to swiftly recover in the second half of the year, provided the outbreak fizzles out by then. Yet, the novel coronavirus has dealt historic blows to the critical industries.
This report shall shed the light on three huge sectors and compare the Covid-19 effect on them to the 2008-2009 financial crisis.
However before starting the anatomy, it’s worth saying, that according to Eswar Prasad and Ethan Wu who discussed in their article published in Project Syndicate entitled “Anatomy of the Coronavirus Collapse”, unlike the 2008-09 crisis that was triggered by liquidity shortages in financial markets, the crisis now unfolding involves more fundamental solvency issues for many firms and industries beyond finance.
Moreover, according to Brookings Institute, another key difference is the worldwide nature of this shock. During and in the immediate aftermath of the global financial crisis, a few emerging markets such as China and India continued to register high growth, pulling the world economy along. This time, no economy is immune, eliminating the option of an export-driven recovery for any country.
Most Critically Affected Industries
Almost all industries were either directly or indirectly affected by the both 2008 financial crisis and Covid-19 pandemic, however three (Aviation, Oil and financial) Sector were most affected. Most inputs and interviews mentioned below were published in DW.
“Clearly, for every airline globally the objective for 2020 will be to survive through this crisis. I fear there are many who will not be able to achieve that, and we will almost certainly start to see some significant airline failures shortly” – ,” Rob Morris, global head of consultancy at Ascend“
It is no secret that the aviation industry which already suffered from high competition and price wars, was the hardest hit by the pandemic which has virtually grounded air travel to a halt and threatens to bankrupt most airlines. British Airways CEO Alex Cruz described the situation as a “crisis of global proportions like no other we have known.”
“Some of us have worked in aviation through the global financial crisis, the SARS outbreak and 9/11. What is happening right now as a result of COVID-19 is more serious than any of these events,” he said in a memo to staff.
Several prominent airlines are seeking state relief to help them weather the current turbulence.
“When we see well-capitalized airlines like Lufthansa making statements about the need for state support, then we know things must be bad,” Rob Morris, global head of consultancy at Ascend by Cirium, told DW. “Clearly, for every airline globally the objective for 2020 will be to survive through this crisis. I fear there are many who will not be able to achieve that, and we will almost certainly start to see some significant airline failures shortly.”
“In 2008-09 we had a demand shock, and inventories built. This [current crisis] looks likely to have a bigger impact, partly because there is a lot of uncertainty still around and partly because it is both a demand and supply story,” Philip Jones-Lux, energy market analyst at JBC Energy“
Global oil consumption is expected to witness its biggest fall in history, hurt by a temporary ban on travel, factory shutdowns with more than 4.7 billion people quarantined in their homes and other measures to contain the virus.
The fall in oil demand caused by the above mentioned reasons, could easily outstrip the loss of almost 1 million barrels a day during the 2008-09 recession, according to Bloomberg. Adding salt to the wound is an ongoing price war launched by Saudi Arabia and Russia which has pledged to flood an already oversupplied market with cheap crude.
“In 2008-09 we had a demand shock, and inventories built. This [current crisis] looks likely to have a bigger impact, partly because there is a lot of uncertainty still around and partly because it is both a demand and supply story,” Philip Jones-Lux, energy market analyst at JBC Energy, told DW. “The industry has been supposedly readying itself for a ‘lower for longer’ scenario, but the current market and outlook are beyond anything that could be reasonably prepared for and we are likely to see some real pain inflicted if prices remain in the $30-a-barrel range.”
“The 2008-09 crisis was far more severe because the global financial system was far more fragile. Banks were not as well-capitalized as they are today” Sara Johnson, IHS Markit Executive Director“
The housing market, which was triggered by cheap loans offered to households by banks, was the epicenter of the 2008-09 crisis. The bursting of housing bubbles in the US and in other countries such as the UK, Spain and Ireland brought major global banks, which did not have enough capital to withstand the shock, to their knees. The banks paid a price among other things for bundling subprime mortgages into complex, opaque derivatives to maximize profits. This time, the banks are in a much better position thanks to increased regulation.
“The 2008-09 crisis was far more severe because the global financial system was far more fragile. Banks were not as well-capitalized as they are today particularly in the United States,” Sara Johnson, IHS Markit executive director, told DW. “While today there are concerns with rising nonfinancial corporate debt, I’d say the magnitude is not as severe as in 2008-09.”