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Looking ahead - Solving the problems that will emerge from the coronavirus

The markets plunged more than 8% yesterday, and look poised to drop sharply today as well. While a lot will rightly be focused on the here and now, it is important to try and look at the impacts of a full-scale crisis, and how the world can resolve it together.

In today's post we look at the key short-medium term repurcussions of the disease, try to analyze impacts on demand, supply, employment, and businesses, and try to analyze how the various problems can be amicably resolved.

Short to medium term repurcussions

The coronavirus while having very low mortality rates (2% average, less than 1% for healthy young people) is extremely infectious. While China, with its authoratarian grip has been able to rein in the disease successfuly, other countries like Italy and Iran haven't been as successful.

In a densely populated country like India, with relatively weak healthcare infrastructure this becomes a serious issue. Recent estimates claim that up to half of Americans and two thirds of all German could catch the disease. The strain such mass spread would put on the healthcare infra and the scare that would ensue at the infra saturates is what is scaring most folks. Italy has begun to see similar effects already.

Consequences on the economy

The consequences of a large scale spread can be manifold. In addition to the supply pressures we had discussed in our earlier pieces, the inability of the people to venture out of their homes will begin to hurt a lot of other industries - tourism being the primary, but also movies, eateries and more. The economic pressures will hurt the small businesses with debt the most, causing a few of them to go out of business, hurting local employment in the process.

A more long term impact of this will be the acceleration in countries trying to close down borders, further strengthening of right wings in most countries and a trend away from globalization in general. The combination of these factors will contine to put downward pressure on economies, pusing them futher into recession territory.

Finding a way forward

The immediate need is clear. Given that most of the risk of this disease comes from its infectious nature, and we have very limited bandwidth to tackle it, best efforts should be made via social distancing to avoid its spread as much as possible.

India does enjoy a few benefits over the medium term. While the tourism slowdown will hit us, along with sizeable hits to other industries, we enjoy the benefits of lower crude resulting in lower pressure on our deficits, lower global rates, and corporate debt to GDP ratio nearly a third of most major nations. The relatively comfortable place that our central bank is in with close to US$500bn of reserves is also a huge positive.

On the issues of closing up of economies, tensions have already been high between most countries. US-China relationships were looking to improve marginally when the issue broke out. The high impact in Europe should strengthen the isolation politics there further. Relationships between Saudi and Russia also appear to be strained. Public sentiment in the aftermath of the scare will also very likely support the leaders with views on isolation, despite the economic impact. Off all the issues that may plague the world, this may perhaps be the trickiest to solve, with few in power having any incentives to address it.

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About the Author: The post is written by Ganesh Nagarsekar. Ganesh is a graduate from IIM Calcutta and has worked with J.P. Morgan and Goldman Sachs, before founding GSN Invest.


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