Is the Coronavirus a Catalyst for the Great Depression of the 2020s

The WHO has declared the COVID19 (Coronavirus) a public health emergency, and with the spread of the virus we know that there will be a large economic fallout.  The exact amount is difficult to quantify at this stage, but anecdotally there is plenty of evidence, and qualitative projections can prove that the COVID19 virus will launch a fatal blow to the global economy.

Although governments are keeping the stock market buoyant, the restlessness and unease in the market is apparent when speaking to those individuals invested in it.  Further anecdotal evidence can be found when speaking to small business owners.  Many of these owners depend on China for manufacturing, but shipments have slowed considerably, putting these business owners at risk of bankruptcy.  Companies that have put all their eggs in the China basket are feeling the pain far more greatly.

Baltic Dry Index – A Leading Indicator

The Baltic Dry Index (BDI) is a leading indicator of global economic problems, and the index has been dropping since September 2019, hitting its lowest point of 411 on Feb. 10, 2020.  The Baltic Dry Index does not tabulate shipping only in the Baltic seas.  The Index which is reported daily by the Baltic Exchange Maritime UK in London includes data on 23 shipping routes and the shipment of many commodities that cross the oceans.  The BDI is based on supply and demand, and demand for raw materials indicates economic growth.  Slower demand therefore portends an economic slowdown.

Baltic Dry Index 1 year Feb 2019 to Feb 2020
Chart: MakingBetterDecisions.ca Data Source: Bloomberg

The drop in the BDI is symptomatic of the trade war between China and the United States, but a greater effect has been seen in the last two months as China has slowed production due to the Coronavirus Outbreak.  This slowed production means that North America is now beginning to see goods shortages that will continue as COVID19 takes its toll on that nation. 

Goods Shortages

Chinese manufacturing has been a drug that the world is dependent upon.  Low labour costs and fast high-volume production have been the draw.  We use more products that are made in China than any other country in the world. 

Shortages in goods from China will have an enormous impact on individuals, but an even greater impact on businesses. 

Goods and production shortages have an immediate impact on small businesses that generally maintain low inventory and have reduced resources.  These businesses are therefore unable to sustain an amplified downturn.  To reduce costs and try to save themselves these businesses have no other option but to begin reducing staff, and the ripple effect begins.  Big businesses will not be far behind.

Restructures and Reforecasts

Apple and Starbucks were one of the first corporations to make decisions to temporarily close their retail outlets in China’s Hubei province, the epicentre of the outbreak.  The economic impact of that decision became visible two days ago when Apple in a letter to investors stated, “We do not expect to meet the revenue guidance we provided for the March quarter” thus invalidating their previous forecast.  Apples woes are two-fold.  One due to shuttered retail and the second due to a broken supply chain due to the outbreak. 

In recent news Wayfair, an online home goods retailer that employs approximately 17,000 people, has laid out a plan to cut 3% of its workforce.  The company is headquartered in Boston, and has been seeing losses, but a large percentage of Wayfair’s goods are made in China.  It may seem speculative, however with slowed production in China, companies like Wayfair are at the whims of the Coronavirus economic fallout.  This is just the beginning of restructures and bankruptcies of large and small businesses.  Governments may be able to manage the stock market, but they will do nothing to save small businesses, where the real story is apparent.

Debt Defaults and Asset Sell-Off by China

As the Chinese economy begins to slip, debt defaults will become a problem and will ripple across the world.  Though China can sustain a weak economy for longer than most countries, a protracted epidemic or pandemic is likely to result in economic collapse.

The Chinese are heavily invested in foreign assets.  According to China’s commerce ministry, Outbound FDI (Foreign Direct Investment) in 2019 was at $110.6 Billion USD.  Regardless of the 8.2% decline from prior year FDI, $110 billion of investment in foreign assets is considerable.

Some of these assets include considerable real estate holdings in the United States and Canada.  As China’s economy slides due to the Coronavirus outbreak, the country will begin to sell off these assets setting off a real estate decline here.  And the ripple continues.

The impact on the world economy due to currently muted travel and tourism is also enormous and one I will write about in a future post.  This one is long enough.  Thank you for reading this far.

Recession or Depression

There is absolutely no doubt that the world will slip into a recession due to the COVID19 outbreak.  Can it be a catalyst for the Great Depression of the 2020’s remains to be seen based on the spread of the virus, the global response to it, and decisions made by our leaders. Is an economic depression possible?  Absolutely.  It all depends on timing, if we are currently working with the truth, and if there is collaborative information sharing. 

Given accurate data, we can make better predictions and therefore better decisions, and therefore better prepare for the fallout.  Poor data based on lies, politics, and fear will only serve to hurt us all and elongate the global problem we face together. This is not a time for borders and individuality. It is a time for information sharing, collaborative work, and strength in unity. It is the only way we can prepare wisely and overcome our global problems.

These are my 2 cents. Give me yours in the comments below.  Do you think we should be preparing for a great depression?


Here’s my latest analysis (April 27, 2020) on the economic outlook due to COVID19

https://makingbetterdecisions.ca/2020/04/27/will-covid19-cause-a-recession-or-depression/

20 Replies to “Is the Coronavirus a Catalyst for the Great Depression of the 2020s”

  1. There have been reports of odd happenings at US FED with money being injected into the system, for a couple of months now, some are suggesting this is related. Or, that the virus is a cover up for something else going on.

    I don’t know that we can tell for sure the full consequences, nobody knows the exact future. But I would say that I think Coronavirus is a major event, and will have major effects on the rest of the world – for all the reasons you’ve said, we (the world) depend on China to manufacture goods, and China didn’t have an extended period of their workers being sick, in their plans.

    What amazes and annoys me, is the slowness with which authorities have acted. For example – One Canadian news outlet (the one still actually doing real journalism) went to the airport (a week or two ago), and was asking Chinese visitors about what kind of screening they’d had – little to none, they were only asked if the felt sick, basically. Given what we’ve heard about how contagious this virus is, why are people still flying (in and) out of China ?

    I don’t know if prediction will come true, it’s possible it’ll be avoided somehow – but it’s best we know, so at least had the opportunity to act in preparation. Hopefully, it won’t be as bad as we think it might.

    Liked by 1 person

    1. The chances of it being as bad as we think is much higher now that the virus is spreading so quickly outside of China. I agree with you on the slow actions and sometimes inaction by governments and leaders. At the Toronto airport it has been a self-reporting protocol. Systems are largely automated. And we know by now that temperature taking is useless as spreaders can be asymptomatic. You ask a valid question about people still flying. The fact that people are still flying all over is a political and economic decision, not one taken with public safety in mind. All we can do now is hope for the best.

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      1. 10-4 on that, profit before human safety wouldn’t be a world first. It’s a worrying situation, and news each day, doesn’t indicate situation is improving.

        Hoping for the best, same as you. Stay safe.

        Liked by 1 person

      2. Yes, today was bad, but not as bad as I expected it might get. My belief is that markets are managed by governments and big funds, and the panic is being managed. Though anecdotally there is a lot of fear out there. At this stage it could go any way and we are just the pawns.

        Liked by 1 person

      3. 10-4 on that. At least now people are starting to pay attention now markets have reacted.

        And yeah, markets “rigged” in my opinion too, been like that for a long time now.

        I think the best thing, is for people to prepare and take precautions (food/supplies). Some may have the luxury of being able to prepare financially, others may not.

        It’s my hope that it’ll get contained, and not do too much more damage, but each day situation worsens.

        Liked by 1 person

      4. Agree with you Don. I think all we can do now is prepare to the best of our abilities. The chatter on Twitter has really changed over the last couple of days. It appears that people are coming to terms with how bad this could get. Let’s just hope we’re wrong. Stay safe my friend.

        Liked by 1 person

  2. I think it will be hard to give accurate info from China, so I guess we need to rely on what companies are doing that do business in and or with China, such as Apple and Starbucks. It is surprising that the global stock markets have not dropped as a result of the virus. What amazes me the most is that I think of a little food stand in China being the catalyst for a worldwide emergency. a true (negative) butterfly effect. thanks for sharing your thoughts…

    Liked by 1 person

    1. Hi Jim, thanks for sharing your thoughts. You’re right, it’s impossible to predict accurately without good data. So we have to assess using a variety of factors. China’s response to quarantining tens of millions of people, burning money, building hospitals etc. tells us the situation is far more dire than the numbers show. Talk about the Butterfly Effect, you’re right. Thanks again, Shelley

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  3. Glad to see these kinds of thoughtful musings from someone in Canada (or, at least I’m assuming you’re Canadian-based?). I guess I’ve grown tired of being one of the few Chicken Littles who keeps yelling about the sky looking like it might start falling, so it gives me hope that some of my fellow Canucks are waking up to the global risks that have been dismissed or ignored for decades.

    I probably should mention that I found my way here based on your comment on Gail Tverberg’s Our Finite World; it may be one of the few places left on the Internet where rational and thoughtful discourse can be had about these sorts of things (perhaps this site will become another place where it is possible?), so glad to see you found your way there.

    Long before I was an OFW’er, I spent a lot of time on The Automatic Earth. Not sure if you’ve heard of it, but sadly, it’s a shadow of its former self now that Nicole Foss no longer writes there. If you’re not familiar with her, I suggest checking out this YouTube video:

    Quite a long watch, but I’ve yet to see anyone else speak on the subject of finance and energy as intelligently as Nicole does (though Gail comes close in her written works on OFW). Here’s one that’s a bit shorter and with more visuals if that’s more your thing:

    Anyways, I’ll try to pop in here from time to time and see what is on your mind 🙂

    Cheers,
    -GBV

    Liked by 1 person

    1. Hi GBV, nice to meet you. Thank you for visiting my site and for sharing your thoughts and YT links, I will take a look at them tomorrow. It’s late now. And yes, I am a Canuck too. I do hope you’ll stop by again. Feel free to subscribe too if you wish. I look forward to furthering the discourse on important and interesting topics. Cheers!

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