The situation of the coronavirus crisis in 2020 evolved rapidly, and the media reported extensively on the economic consequences of the pandemic. What will be the impacts of lockdowns, part-time unemployment, recession, financial crisis and economic crisis? And how should we react to this economic and financial crisis linked to the coronavirus health crisis?
Unprecedented economic crisis
The covid 19 crisis certainly triggered a global economic crisis. The exact impact of this crisis is still difficult to quantify, but the shock has been extremely violent throughout the world.
This crisis has nothing to do with previous recessions. The cause is not the bursting of a real estate bubble, nor a world war with mass destruction (bombs), nor a problem of exchange rate adjustment. The main economic problem was the confinement of the population. This reduced demand (most stores were closed and consumers confined) and supply (many workers were confined to their homes).
Knowing this, it makes no sense to compare the current economic crisis with those of 1929 and 2008-2009.
It is obvious that because of this “unimagined” crisis, bankruptcies have followed one another and the rise in the unemployment rate has been “dazzling”! Bankruptcies were expected to increase by at least 25% worldwide. A disaster! It’s surprising, but it didn’t happen. In Canada, thanks to the government’s assistance to businesses forced to close, the number of bankruptcies has decreased by 16% in 2021 compared to 2020.
According to Statistics Canada, Canadian households consumed 15% less in the second quarter of 2020 compared to the first quarter before the health crisis.
Canada plunges into an unprecedented recession
With a 4.9% plunge in GDP in 2020 vs. 2019 Canada has officially entered a recession. Such a drop has never been recorded since the inception of the tracking of this statistic in the early 1960s.
To sustain the economy and try to elude an economic crisis…
To help struggling households and businesses, governments had to increase their spending. In Canada, over $76 billion was “donated” in the form of the Canada Emergency Response Benefit (CERB) in 2020 to workers. In addition, business assistance benefits amounted to over $86 billion. Combined with other types of direct assistance, such as support for families, the federal government has spent $212 billion to address the impact of the pandemic.
The state has had to take on significant debt, probably at levels never before seen in history. Obviously these measures have automatically increased the public deficit. The country borrowed billions at very low rates, but still. Santa Claus doesn’t exist and the country is now living on credit. The federal government’s budget deficit reached $282.6 billion for the period of April through February of its 2020-21 fiscal year. Canada’s debt continued to rise. Tax increase or not, at some point this money will have to be paid back.
This fall in GDP and government debt are historic. This is the case in all countries. This crisis is probably more severe and extensive than the one of 2008-2009, which was already the most violent since the crash of 1930.
A reduction in activity always has consequences but…
…this 2020 reduction was going to be unpredictable. The IMF (International Monetary Fund) expected an “intense” crisis but no one could predict the magnitude of the consequences. It is important to realize that the world economy has never, EVER come to a complete stop overnight. This is unheard of! The experts are unanimous that there is a crisis and a massive recession. But how long will this last and how do we soften the negative consequences?
What are the negative consequences? Despite the CERB, many employees on unemployment saw their incomes decline during this period of confinement. This obviously had a direct impact on their purchasing power. Several small businesses that were shut down during the lockdowns didn’t survive. The closure of several companies created a wave of layoffs. And the companies that made it through had to raise their prices to compensate for their lower sales and lower profits. Inflation in Canada in 2022 is 8.1%. But many products have increased by more than that.
An article from Les Echos* explained: “Temporary unemployment is a short-term measure. When the State ceases to pay the salaries of the confined, and if the activity does not start again quickly, there will be certainly and necessarily be waves of layoffs, hiring freezes and business failures.“
In fact, in Canada in 2020, more than 3,000,000 salaried jobs were lost in 2 months. By the end of 2021, Canada had regained all the jobs it had lost with the pandemic, but not necessarily in the same sectors, nor for all workers.
Experts had predicted that approximately 60,000 new jobs would be created in Canada. But there were, in fact, 157,000, reported Statistics Canada, bringing the total number of jobs (19.13 million) just above its February 2020 level, just before the COVID-19 pandemic.
A financial AND economic crisis
The stock market crash of March 12 of 2020 was a memorable Thursday on the entire planet in terms of the stock market. But how can a “simple” coronavirus upset the world economy so much and so quickly? Here’s a crash course on the economy.
First of all, it is important to know that countries around the world depend on each other for the production of goods and services such as clothing, car parts or telephony, fruits and vegetables in the Nordic countries, etc. Confining the population slowed the production of many consumer products. Thus, global economic growth plunged by 3.3% in 2020. The borders closing and the travel ban even in the same country or province or city, the interruption of business exchanges because of the closure of some manufacturing plants, people who have reduced their consumption of certain products as their revenues drastically decreased, etc…all this created an impressive panic that was then directly reflected in the stock markets.
It’s all about profits!
To simplify and illustrate, the sole purpose of investing in the stock market is to make profits. So when a major international company announces that it is shutting down all its operations worldwide for an indefinite period of time, it is quite normal for investors to think that production and sales will drop drastically. Lower sales = less profits. In other words, since the health of the stock market depends on the health of the companies, we anticipate that their activity and profits will decrease as never before, and it is clear that their investments will also decrease. Also, if there are fewer sales and less production, eventually there will be layoffs. It’s a real “snowball effect”.
In general, an investor who panics will sell his shares as fast as possible! But if all investors sell their shares at the same time, and no one wants to buy anymore, it will cause the stock market to plummet.
Sell or keep my shares?
One simple and very important thing: Don’t panic! As long as you don’t sell your shares, there is no loss because it is virtual value. You have to give the market time to recover before selling or the losses will become real.
You have to invest in stocks for the long term. For your short-term needs, you need an emergency fund that is not invested in the stock market. This way, if you need money urgently, you will have liquidity and will not be forced to sell your shares at a loss.
Don’t let your emotions take control of your money.
Above all, don’t let your fears control you. You are capable of deciding how to react. Don’t run to the grocery store to buy lots of toilet paper because your investments have lost value!
Economists speculate and try to predict the future. We now know the disastrous short-term consequences of this global pandemic. But nobody can really predict the long-term impact on stock markets and the global economy, nor the psychological impacts. In the short term, the tourism industry has been turned upside down as well as the real estate market, downtown skyscrapers are empty, inflation has increased tenfold and is hurting households in all countries. These are just a few of the results. Click here for tips on how to get through an economic crisis. And remember that historically, stock markets have always recovered from the worst of economic crises. Keep up your good financial habits and keep living!