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Tuesday, March 10, 2020

Stock market crash: Corona virus As a Fire Accelerator

Gloomy signs of the global economy: Prices are slumping on the stock exchanges and the oil price is falling. Is there a global recession looming because of the coronavirus? Questions to the economic researcher Martin Braml.

Martin Braml: Not only. The coronavirus is a trigger for some things that have been pent up before. We must not forget that there are always corrections after highs. Only four weeks ago, the Dax and other stock market indices set records. But these corrections are now beyond normal. Of course, the coronavirus plays a role and great uncertainty. Nobody knows what will happen next, which region will be sealed off next, whether supply chains can be maintained, whether more people cannot go to work because they are quarantined. This uncertainty is reflected in the stock exchanges.

There are also large losses in the oil price, which has fallen by almost 30 percent. The background to this is a dispute between the OPEC countries and other producing countries over a reduction in the production volume. Does Corona not matter here?

Yes, Corona also plays a role here. When the factories and parts of public life come to a standstill, less oil is required. This lower demand led to losses in the oil price even before the OPEC dispute at the weekend. The OPEC cartel then usually agrees to cut production volumes in order to support prices. At the weekend, however, it was shown once again that the cartel is very unstable and that one cannot agree - hence this significant downward swing.

Another message that has a dampening effect on prices: The economy in Japan has shrunk more than expected, the minus in the fourth quarter was around seven percent a year. At least that has nothing to do with Corona, after all, it's about the last three months of 2019.

In fact, economic problems appeared long before the outbreak of the coronavirus. German industry has been in recession for six quarters, and has been shrinking since the third quarter of 2018. This has a lot to do with the automotive industry, and machine builders also have problems. Corona makes some problems visible that were there before and reinforces the whole. Similarly in China: growth rates there have been declining for a long time, the trade war with the USA has had a negative impact, and many Chinese companies have long been over-indebted. The Chinese government is now providing liquidity to alleviate the problems, but the fundamental problem remains.

So is there a threat of a global economic downturn?

At least for Germany and Europe, a recession is not out of the question. The uncertainty is high. We do not know what medical course this disease takes and what political measures are being taken. There could also be a recession worldwide. It will also be decisive how the situation in the United States develops.

The German government also wants to support the economy. Short-time work should become easier, and federal investments will be expanded by several billion euros. How do you rate that?

It is absolutely right to extend short-time work benefits. Germany has had very good experiences with this during the financial crisis. In this way, employment can be maintained when production is at a standstill, and when things are going better, companies can return to growth more quickly. Liquidity aids such as tax deferrals or bridging loans are also correct. With investments, however, the question arises whether they will work in time. Construction work always has a long lead time. And even when building, you need companies that can do it and whose workers don't have to stay home because of the coronavirus.

In Hong Kong, the government has opted for a different form of aid and is relying on helicopter money: every citizen receives more than 1,000 euros as a gift. The hope is that private households will spend the money again and thus support the economy. Similar approaches exist in Singapore and Macau. Would that also be an idea for Germany?

I don't think it will have a big impact in the short term. People want to consume, they want to go to concerts, eat or go on vacation. But they can't because events are canceled and flights are canceled. So money is not the problem, but missing opportunities to spend money.

Will one look back at some point in time and say that the corona virus was the accelerator for crisis developments that already existed?

There is currently no clarity about the harmfulness of the virus. It could also be that normalcy is returning faster than can be foreseen now. The assessments cover the entire spectrum - from "Great Depression" to "it's not that bad". At the moment, I think it is completely impossible to realistically assess what is to come.

Martin Braml works at the Ifo Institute for Economic Research in Munich on the topics of international trade and foreign trade.

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