Coronavirus rodolia will “shake” the world economy. There is a decline in the stock market, the approach of a recession, lower interest rates, the fed, reports USA Today.
All this is reminiscent of the 2008 crisis.
For many Americans, the fall of market sales and growing talk of recession in the last few weeks due to global spread of mers revive memories of the financial crisis of 2008 and the great recession.
Although the consequences that ultimately may result in disease spread in the country, is not clear, the economic turmoil caused by the outbreak probably will not be as devastating and lasting as the historic recession of 2007-2009.
“The recession is not inevitable, If indeed goes into recession, it is likely to be brief and much less severe than the Great recession”. says Gus Poser, chief economist at PNC Financial Services Group.
The financial crisis and recession of 2008 were the result of weaknesses in the economy that existed for many years. Now it is not. What we see caused by external factors.
Currently consumers, businesses and lenders are much better prepared to possible shocks, and will be able to recover.
Comparing the current coronavirus crisis and the crisis of 2008
The great recession. The decline was caused by jumps in the housing market. Banks and other lenders approved mortgage loans, including for many unskilled buyers that raised housing prices to dizzying levels. Banks combined mortgages into securities and sold them to other financial institutions.
When housing prices began to decline, millions of Americans have stopped paying on mortgages and lost their homes while the banks, the holders of the securities, on the verge of bankruptcy.
Frequent layoffs in real estate, construction and banking led to lower consumer spending and led to an even more serious loss of jobs throughout the economy. Bank lending was almost frozen, which led to almost a complete halt of the economy. Problems in the housing market and the banking system accumulated over the years.
Of the current crisis. Coronavirus that emerged in China late last year, creates a dangerous economic situation. Currently in the world more than 100 000 cases, most of which are in China and the death toll has exceeded 4000. In the United States more than 800 people were infected, and 28 had died.
Because it affected far fewer people than in 2007-2009, the economic damage is still not high. The most affected industry of travel and tourism. Businesses canceled conferences and exhibitions, and consumers refused to vacation plans. Because of the violation of the supply of industrial parts and retail goods from China may temporarily close American factories, and the shelves remain empty.
As Americans try to avoid places with high concentration of people, the virus will probably hurt sales at restaurants, shopping malls and other places. According to the company Cuebiq working on data about customers, in the last week of February, the number of visitors to Walmart stores fell by 16.5% compared to the previous week. However, in the same week, traffic in stores Costco grew by 7.7%.
The great recession. As banks freely gave out loans to mortgages, auto loans and credit cards, according to Oxford Economics and the Federal reserve, household debt rose to a record 134% of gross domestic product. The Americans had saved just 3.6 percent of their income at the end of 2007. When the Americans had repaid that debt, and spending fell sharply.
Of the current crisis. Household debt is at historically low levels, 96% of GDP. Households save about 8% of their income. All of this means that they can cope with a short-term downturn and lower spending.
The loss of a job
The great recession. Nearly 9 million Americans lost jobs in the economic downturn. Unemployment more than doubled to 10%.
Of the current crisis. Dismissal is likely to number in the thousands, and many of them occur in the field of travel, tourism and production. The unemployment rate of 3.5%, a 50-year low, may rise to 3.8% to 4.1%. This was stated by the chief economist at Grant Thornton Diane swank.
How long does it last
The great recession. Recession with millions unemployed, a reduction in household and business lasted 18 months.
Of the current crisis. It is assumed that the number of cases will peak in the next few months and will decrease by the summer, swank says that any recession will probably last a maximum of six months or so.
The great recession. During the recession economic indicators decreased in five of six quarters, falling by 8.4% at the end of 2008.
Of the current crisis. Most economists expect that in the next couple of quarters, the virus will undermine the growth of the economy one or two percent.
The stock market
The great recession. During the crisis, the stock market fell by 57%.
Of the current crisis. The stock market was not observed such a significant drop that the market was in the midst of the financial crisis. The index Standard & Poor’s 500 on Tuesday 19 February, fell by 14.9%, while in the bottom of the market, or a fall from peak is 20%.
The great recession. According to S&P Global Ratings, at March 31, 2009 corporate debt of 5.8 trillion dollars. Less than two-thirds, or about 65%, with a high probability were able to extinguish it.
After falling revenues, many companies, including financial institutions, manufacturers and retailers collapsed.
According to the Bureau of labor statistics, from January 2008 to January 2010 in the automotive sector, the producers cut about 278 400 jobs, or about 29% of their collective workforce, a reduction basically got automakers and suppliers.
Car companies are especially vulnerable to economic downturns because people will often postpone the purchase of the machine, to improve economic conditions. Car sales in the US plummeted during the great recession.
Of the current crisis. According to forecasts of S&P Global Ratings, in 2019 the corporate debt of 9.3 trillion dollars.
But a higher percentage of corporate debt is now considered investment, at 72%.
The primary sector, which, in all probability, will not be able to make timely payments, as of 2019, and became the automotive industry, where 4 out of 5 companies have a theoretical duty.
Another sector that is subject to significant risks, is retail, where Department stores, shopping malls and many other stores are already feeling the difficulties.
Although it is expected that the oil and gas sector will suffer from the sharp decline in oil prices, the industry is ready for the approaching crisis. Only 31% of oil and gas companies had debt in 2019.
Rules for banking
The great recession. The global financial crisis has led to radical changes in the regulation of the banking industry by the US government. New developments included the Dodd-Frank in 2010, which required banks to have more cash in reserves to provide cushion in case the financial system will face economic turmoil.
In the United States banks with assets of more than $100 billion must undergo “stress tests” of the Federal reserve system, to be able to provide financial firms with the capital needed to continue operations during periods of economic downturn.
Of course, in the near future, the profitability of banks may be threatened if they are forced to tighten lending standards. Historical fall in bond yields in recent times has also put pressure on banks.
Financial institutions, as a rule, regional banks may face obstacles in the coming months, if you borrow money from energy companies. Because their shares after a sharp fall in the price of oil has fallen in price. But the big banks probably won’t face serious risks since they tend to be more diversified and not concentrated in one sector.
Of the current crisis. The extent of the problems facing the economy are not as bad as during the great recession, experts say.
The stock price fluctuated during past epidemics, experts say, however, it is difficult to draw Parallels between the rapid decline of the financial market in recent years, and past failures.
“It’s not a financial crisis is a global epidemic,” says Jonathan Corpina, senior managing partner at brokerage firm Meridian Equity Partners.
Stock price compared to the profit generated by the company is the way in which investors measure the value on the stock market. According to this indicator, the ratio of prices to income, when in mid-February, the S&P 500 peaked, was 19. This is down from 12.5 in March 2008. It is also above the 5-year average value of 16.7 and 10-year average of 15.
The great recession: the key interest rate of the Federal reserve system in 2007 was at 5.25%, as fears about a collapse of housing has increased. This gave the Central Bank enough room for a rate cut to almost zero by the end of 2008. The fed also began the unprecedented bond purchases to reduce long-term rates such as mortgages.
The current crisis: the base rate the fed is in the range from 1% to 1.25%, which gives little opportunity for reduction. And 10-year Treasury rates already below 1%, which raises questions about the effectiveness of the new campaign for the purchase of bonds.
The great recession: the recession affected the entire economy and, therefore, the Congress decided to accept a stimulus. American law on the refund and the reinvestment of $787 billion has allowed to save on taxes and loans to individuals and companies. Provided funds for health centres and schools, workers with low incomes, approved large-scale modernization of transport, energy and communication networks.
The current crisis: the damage this time is less significant, and legislators are discussing a more targeted measures, such as assistance to tourism companies and compensation for losses of income for hourly workers by increasing paid sick leave and unemployment insurance.
The great recession: according to the National Association of realtors by 2006, housing prices have more than doubled, and then fell sharply. The housing market remained in the doldrums until 2012.
The current crisis: although prices in recent years has grown steadily, they are 22% higher than its peak. Fosher says that house prices are not too high. This means that at low rates of mortgage loans, the housing market could help resolve issues in other sectors of the economy.