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April 2020
10 Min read
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Expert Opinion: Crisis 2020.
What Comes Next?

Natali

Journalist, PR-manager, content creator

Expert Opinion: Crisis 2020.
What Comes Next?
3 votes

During a briefing on March 27, Managing Director of the International Monetary Fund Kristalina Georgieva announced that the world had entered a new recession, that is, a new economic crisis had been triggered.

We talked about possible scenarios of economic development, important figures and the crisis consequences with an expert and managing director of Scheduling research company Dmitry Pavlenko.

What Is Today’s Economy?

The economy is essentially interaction and transactions. People, cities, countries consume goods and services making transactions. The economy’s driving forces are the volume of these transactions and “sellers” and “buyers” behavior. Therefore, one of the markers that we will consider today is those actions and flows that occur on the stock market. As a research company, we keep track of human behavior patterns.

There are two key players in the global economic market. This is the United States with almost $20 trillion – 24% contribution to the global GDP, and China with its $12 trillion – 15%. Then go Japan, Germany, India, the United Kingdom and so on. The entire story is that one big behavioral factor, either way, moves global numbers up or down.

What Causes the Global Crisis?

When we talk about today’s crisis, which has already come, there were certain prerequisites. The pandemic we suffer today is one of the reasons. But, a little earlier, we have already faced the harbingers of the crisis.

The first signal was natural disasters that had been ragging in the past few months. The second mark was the escalation of conflicts in the Middle East. The third one — the failure of the OPEC agreement that resulted in oil prices decline to minus 30% on March 9. It has happened for the first time ever since 1991.

It was clear for all key players that production and oil extraction were declining in the world. In such circumstances, it was necessary to keep balance somehow. Accordingly, they decided to agree on certain prices. However, not everyone made a concession, so the largest decline in the last 30 years has occurred. At a conservative estimate, now Russia loses $100-150 million per day due to this ‘oil story’.

Five years before the coronavirus pandemic, in his speech at a 2015 TED Microsoft founder Bill Gates predicted that the world would face the virus, and it would become a global catastrophe.

Marketing Expert

What Are the Scenarios for the Global Economy Development During the Crisis?

We live in an uncertain environment when it is difficult to accurately predict how the situation will develop. Just recently at the Organization for Economic Cooperation and Development presentation two possible scenarios for the global economy development were introduced. The first is the Base Case and the second, unfortunately, is not the Optimistic Case, but the Downside Case.

The Base scenario assumes approximately a 0.5% decline in global GDP, while the Downside scenario — 1.5%. However, the main consulting companies say that GDP will slow down to 0.9 – 1.1% of growth. In fact, globally these percentages are huge amounts of money.

What Are the Consequences of the Crisis?

For example, according to Bloomberg, China’s GDP is predicted to grow at around 3%, which is a record low over the past 40 years for the country, when a stable rate was 6-7%. And this is the second economy in the world, which also is predicted to have a 14% decline in production. This is enormous money.

Over the past 10 years, China has become three times better integrated into the global economy, both as a supplier and as a consumer of various goods and services. It became a contributor to the European Union trade mechanisms as well. Only in the USA China imports about 50% of various electronic devices. This means that the world will be stressed with renewed vigor.

Since the share of influence of world players such as the USA and China is massive, the crisis is now only reaching other risk economies. And if we take a look at the charts of the key currencies’ behavior in the CIS markets (Ukraine, Russia, Kazakhstan), we can notice that investors still go and buy the debt of the US Treasury, leaving the so-called risky economies directly in favor of protective assets. Now the demand for debt obligations of the US Treasury is $3 billion, so everyone will go there and, of course, this will provoke, among other things, the local currencies’ devaluation. To what level — it depends on state intervention.

What Is This Crisis Comparable To?

They used to compare this crisis with the Great Depression of 1929-1939. Prior to that, as now, in 1918-1919 the world had to face little-known ailment — outbreaks of Spanish flu. In the same period, all securities markets collapsed and American key indices declined, and people suffered from total unemployment.

According to the leading research companies forecasts, in the nearest future, the US unemployment rate will increase by 2 times. If we take into account the cyclical nature of the economy, then the similarity with Depression is clearly present.

I am inclined to consider this crisis in comparison with 2008 when the market was overheated. To date, the market is overheated even more. This is proved by the P/E ratio — the price of shares divided by the net profit from the share. This indicator shows us how many years these shares will be cost-effective. So, for key companies such as Google and Facebook, the payback period is 25 years. For Netflix, it is generally equal to 87 years, excluding dividends. Therefore, the market is overheating again. And it likely that consequences will be worse than after the 2008 crisis, given the current pandemic.

How Has Coronavirus Affected the Global Economy?

The international organization and all consulting companies considered scenarios focusing on the fact that coronavirus will not spread so quickly after all. Therefore, the worst development for the global economy cannot be excluded. I think these are conservative forecasts so far.

Global technology companies have already suffered huge losses due to coronavirus. Facebook admitted that the company would return to normal figures by 2021. To date, Google has lost $30 billion. Well, the total economic losses are expressed on average from $2.4 trillion and higher.

The death rate is rising, people are working from home, countries, and cities are being closed. Naturally, consumption falls in many niches. Offline-dependent spheres such as tourism, restaurant business, luxury clothing retail, and big-box retailers have revised their strategies and moved to online, organizing delivery of their goods. This is reasonable, of course, but enormous losses cannot be avoided.

The key indicators of the American economy have been growing for more than 10 years. Now the S&P 500 index is showing a record decline — up to $3,600. The companies should consider alternative strategies in response to the continued impact of the coronavirus pandemic on economic activity and financial markets.

How Will the Financial Crisis Affect People’s Lives?

Amid the crisis, the employers suffer, too. The sales fall, the costs for production unit increase, profitability decreases. Some companies that sell non-essential goods are closed now, and the number of bankruptcies will only grow. Naturally, business owners have to choose some optimization strategies. This often leads to reductions in personnel, resources, investments.

Obviously, people will suffer very much. Behavioral factors will change, people will spend less, and accordingly, a business will receive less.

When Will Global Recovery and Turn For the Better Happen?

First of all, the restoration of all processes will depend on the pandemic decline. While everyone is under quarantine, the trade will continue its natural inhibitory processes. According to our forecasts, the situation will have been stabilized by the end of this year, and total recovery will happen not earlier than in 2021.

Now everything depends on infusions into the recovery by the states. For example, during the quarantine period in Germany companies pay to the employees 30% of salary, and invests 40% in the country. The United States and the Big Twenty are now ready to invest $4 trillion in supporting the economy and in subsidizing business with various interventions, including lowering interest rates. Perhaps, those rates will even be negative in order to stimulate businesses, respectively, to take loans.

Those who reformat sooner will recover faster. Well, and the most likely, successful economies such as Japanese and American will be the first to do this because technological effectiveness will enable them to make a quantum leap. Also, it all depends on the support of the Eurozone a lot.

How to Overcome This Crisis?

Each brand takes very specific actions. Large companies that we’re able to discern the crisis harbingers did everything possible to protect themselves for this period.

The previously mentioned Facebook presented its ‘Horizon’ project with virtual reality in mid-2019. They have invested $3 billion dollars in it. They have their own company producing virtual reality helmets. Making money, the company thereby reinvests it in the economy.

If the business manages to concentrate on its internal talents, balances cash discipline, and competently operates its supply chain, then the business will survive. Starbucks is a prime example.

In 2008, the company downsized 7,000 employees, closed a bunch of restaurants — and reoriented to co-creation. They started to create more products with customers, activate them better, work more efficiently. This confirms the rule that crisis situations help companies to refocus and reformat.

And what is most important in such a situation, we need to support each other. We witness many examples of collaborations and business support. Fortunately, now we can realize that without leaving our homes. It is preferable for the companies to support their employees, their morale — there are many different instruments for this purpose.

Take care of yourself! Any crisis comes to an end sooner or later!

 

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