6 Ways A Deadly COVID-19 Pandemic Could Impact The U.S. Economy And Cause A Financial Crisis

6 Ways A Deadly COVID-19 Pandemic Could Impact The U.S. Economy And Cause A Financial Crisis

financial crisis
Analysts warned for months that seemingly strong markets would fall. “A stock market crash was coming, coronavirus was just the spark.” Cruise ships and airlines have been hit hard. The Symphony of the Seas docks at Saint Nazaire port, France, March 23, 2018. (AP Photo/David Vincent). Masked person: Photo by Macau Photo Agency on Unsplash

Analysts warned for months that seemingly strong and steady markets were poised for a fall. The fall started last week. “A stock market crash was coming, coronavirus was just the spark,” reads a Time headline.

The COVID-19 coronavirus has claimed 3,356 lives — mostly in China — with 98,053 cases in 88 countries.

As multiple countries impose restrictions on travel and daily life, airlines and tourism take an economic hit that is being compared to the aftermath of 9-11 and the 2008 financial crisis. Because the epicenter of the virus was in China, global supply chains that rely on Chinese components are stressed. “The ingredients for a conflagration were there, and all it took was a spark,” Zachary Karabell wrote for Time.

Here are six ways a deadly COVID-19 pandemic could impact the U.S. economy and cause a financial crisis.

1. The travel sector

An estimated 10 percent of the global workforce is in some way connected to travel and tourism. Fearing infection from coronavirus, people stop flying and going to hotels, cancel corporate events and postpone taking vacations. This has an economic impact. The virus can stop movement in the economy.

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Cruise lines have been among the hardest-hit markets after a ship was quarantined off Japan’s coast with more than 600 confirmed cases. Cancellations and profit warnings followed throughout the industry. For cruise operator Royal Caribbean Cruises, the cost of credit-default swap contracts more than tripled in less than a week, Fortune reported.

Airlines say they could lose 19 percent of their business if the coronavirus isn’t contained soon. “The last time we’ve seen anything close to this is post-911,” said Scott Solombrino, executive director of the Global Business Travel Association, in a CNN interview. “If there’s nobody traveling on planes, there’s nobody staying in hotels, no one’s using taxi cabs, Ubers, chauffered cars, no one’s going to restaurants. Everything kind of stops and that’s the problem … This is the black swan that landed on your lawn.”

Chinese visitors, until recently, have been the largest-growing segment in New York City’s hotel industry. The coronavirus is a potential kick in a market already under stress. At least 21 New York City hotels backed by commercial mortgage-backed securities are on a watch list for difficulties, according to Trepp, a provider of commercial property data and analytics. Despite declining hotel-room revenue and occupancy rates, NYC is in a hotel-building boom — bad timing in a financial crisis.

2. Interest rates 

The U.S. Federal Reserve this week cut interest rates by half a percentage point to support the economy in the face of the spreading coronavirus — and more cuts are expected in an effort to lessen the impact of a financial crisis. Some analysts saw this as a high-risk bet. Lowering interest rates makes borrowing costs cheaper and could encourage businesses and households to take out loans and spend, which would stimulate the economy, CNBC reported. But by cutting interest rates down to zero, big banks are compromised from making money. Banks would be materially hurt in a zero-interest-rate economy. 

Globally, interest rates have generally stayed low — with some at negative levels — since they were cut after the 2008 global financial crisis. That means some central banks may not have room to take rates much lower, analysts said. For those that still do, any rate cut may not be effective in lifting economic activity.

“If this turns into a pandemic that engulfs the U.S., it’s pretty difficult to envision the U.S. economy getting through without a full-blown economic recession, which means the entire global economy will be in recession,” said Mark Zandi, chief economist at Moody’s Analytics.

3. Mass layoffs

More and more companies say their businesses have been disrupted by the coronavirus, potentially hurting sales and profits. Companies impacted by the crisis, such as retailers whose customers stop shopping in their stores, will likely lay off workers. Economists are watching closely to see if layoffs start to rise, Marketwatch reported. Airlines, cruise lines and hotels could lay off hundreds of thousands of workers. If customers stop going to restaurants, events, and shopping malls due to fear of COVID-19, businesses will have to lay off workers.

“If supply chain disruptions or the cancelation of public events start to happen on a more significant scale, we may see an acceleration in layoffs as a result and it will show up in the claims data quickly,” said Thomas Simons, senior money market economist at Jefferies LLC.

4. Bankruptcies

Companies heavily in debt would be impacted by an impairment in their earnings. As financing conditions tighten up for companies with declining earnings, they wouldn’t be able to service their debt. An escalating coronavirus outbreak that drives away customers and revenue could lead to ratings downgrades, hinder refinancing efforts, and in some cases trigger defaults, Fortune reported. For example, if WeWork has $500 million in leases around the world and businesses cancel their subscriptions to the WeWork co-working-space model, WeWork would be heavily mismatched between its leases with landlords and businesses willing to pay.

One British airline has already declared bankruptcy in part due to disruptions caused by COVIF-19. Regional carrier Flybe forced the cancellation of dozens of flights across the country.

5. Supply chain disruption

Governments and companies around the world are discovering that their China-linked supply chains bring not only financial advantages but risks, according to Foreign Policy. The coronavirus won’t help bring jobs back to the U.S., as Trump administration officials have suggested. On the contrary, it’s likely to cause reduced manufacturing in North America and other Western countries as Chinese-made components fail to arrive, causing production delays. Companies can’t get the products they need from China or Italy in time to efficiently do business with customers in the U.S. Shipments of product move slower or stop.

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Anything related to Chinese manufacturing has been disrupted by the coronavirus, from antibiotics and iPhones to auto parts. Economists and businesses worry about shortages of everything — a “supply-chain shock.” In that scenario — high demand and low supply — expect prices go up.

6. Stock markets crash

Coronavirus fears last week pushed the U.S. stock market into its worst week since the start of the 2008 recession. “Stock market crash,” the headlines read. The Dow Jones Industrial Average, an index of 30 major blue-chip stocks often used as an indicator for the market itself, had its single biggest one-day drop in history, falling 1,191 points on Thursday. Five trillion dollars were wiped from global financial markets after investors sold their stock or put it into “safer” investments.

If the wealth of investors goes down, trillions more could be wiped out from the value of global stocks. If the wealth of 401Ks and investors goes down, they are likely to pull back and hurt the economy.

BuzzFeed News provided some historical perspective. The Dow dropped 4.4 percent last Thursday. During the Wall Street crash of 1929, it dropped 13 percent one day and 12 percent the next day.

Not all stocks are negatively affected. Health-care stocks rallied after Joe Biden’s Super Tuesday win, and stocks of companies developing vaccines, tests and other treatments for coronavirus show strong gains.