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Governments Tested in the Face of Covid-19 Pandemic

March 25, 2020
Editor(s): Dahye Koo
Writer(s): Anuk Kariyawasam, Emily Hartley, Sean Reid

As the COVID-19 pandemic continues to grip the world, 2020 has seen new challenges emerge, ending an era of economic prosperity and bullish markets around the world following the Global Financial Crisis of 2008/2009. 

As of March 2020, the effects of the coronavirus are being felt in Australian financial markets with investors spooked, reigniting fears of an upcoming recession. The power now lies in the hands of governments and central banks worldwide to restore confidence and prevent the next great financial crisis, but is this truly achievable? Or will extreme market volatility drag the world economy down to devastating conditions?

When attempting to evaluate the true impact of COVID-19 on the economy, it is essential to have an objective lens free of media-driven hysteria and to always consider the long-term. Warren Buffet, the legendary “Oracle of Omaha”, advised investors “our favourite holding period is forever”. To validate this statement, investors must look at past crises of a similar nature. For instance, the last worldwide recession, the Global Financial Crisis, saw the collapse of the subprime mortgage market due to irresponsible lending practices in an illogically overvalued housing market and loose regulation on banks. This then created a ripple effect onto the rest of the stock market and, by extension, the world economy. 

Considering how the market fell more than 30% in this troubled period, it is understandable that investors fear COVID-19 has not had its full impact yet. What is often forgotten about the crisis is, even though the Dow fell near 7,700 points in 2009, the market did eventually recover, bringing us to all-time highs of over 29,000 early this year. Mass hysteria held as much responsibility as the irresponsible banking sector did in causing the worst of the Global Financial Crisis, and investors would do well to learn from their losses in 2009 and remain faithful in the economy. The graph below illustrates how an investor at the very peak of the stock market in 2007 before the crash would break even and see their equity continue to grow by 2012 and to this day.

Source: Trading Economics

However, actions speak louder than words and the markets may remain spooked if governments are not vigilant about ensuring COVID-19 is contained. The growth rate of the virus around the world is alarming and getting it under control remains a priority for the governments around the world. The graph below illustrates contrasting efforts by a number of nations to contain the spread of COVID-19, highlighting the rapid growth rate if left unchecked.

Source: Department of Health

Federal governments around the world must learn from the heartbreaking conditions in Italy, Spain, and France and take successful measures like South Korea and Japan have, ensuring that medical staff is able to cope with the increasing number of new patients. 

Italy can be seen as an example of inadequate practice in containing the spread of COVID-19. To act responsibly, the government of Australia and the rest of the world must act swiftly to limit the spread of the virus and prioritise the wellbeing of the population. The first stimulus package announced is a step in the right direction for Australia. Drawing comparisons with the global financial crisis of 2008, Australia was able to avoid recession largely thanks to the swift actions taken by former Prime Minister Kevin Rudd’s government. Moving forward expansionary fiscal policy must now be exercised liberally, hand-in-hand with public safety measures. Just as welfare recipients with a higher marginal propensity to consume have been targeted by the government, it must now seek to expand these benefits to higher income brackets and ensure that workers can continue to enjoy financial security in the face of the growing pandemic. 

The US Federal Reserve cut interest rates to 0% and the RBA also cut the interest rate to 0.25%. While investors and business owners may fear drastic measures like quantitative easing and a possible lockdown, the long-term outcome of these actions is likely to benefit all stakeholders. As long as small businesses are supported by governments and guided to offer “work from home” solutions to their employees, the integrity of the economy will be maintained and the stock market may be set up for a steady and swift recovery. 

While investors and business owners may be appeased by grants and subsidies, the public ultimately decides the success of these efforts.

In periods of economic turmoil and a real public health crisis, the media is vital to inform the public but it is also important to avoid unnecessary panic. Unfortunately, the media thrives on panic leading to some disastrous results around the world.

An especially worrying example of this is a massive spike in gun sales in the US, with lines stretching several blocks looking to purchase “assault rifle” style weapons, some states seeing ammunition sales jumping 179%. Further highlighting the extent to which the public believes their way of life will be impeded by the crisis. Furthermore, panic hoarding in Australia has left shelves bare at major retailers, leaving customers unable to purchase basic necessities like toilet paper and many food staples. In these fear-driven times, the government and media must educate the public and continue to urge them to avoid selfish hoarding. 

At present COVID-19 presents a truly new crisis for governments to manage. It must juggle the duties of public health and wellbeing while ensuring the economy remains stable. It is clear that the time calls for a joint effort by the state, public, media, and investors to remain vigilant yet calm. This will increase the chances for the global economy to recover fully from the pandemic and return to another decade of economic growth.

References

Stickings, T. (2020, March). Italian coronavirus victims over 80 will not receive treatment if situation worsens under emergency plans, as PM warns country is entering its ‘riskiest weeks’’. Retrieved from https://www.dailymail.co.uk/news/article-8116223/Italian-coronavirus-victims-80-not-receive-intensive-care.html

McCormick, E & E.David, J. (2020, March). Stock market news live: Coronavirus jitters send Dow swooning to worst-ever point loss, closes at near 3-year low. Retrieved from https://finance.yahoo.com/news/stock-market-news-live-updates-march-16-2020-220735000.html

The Global Financial Crisis. (n.d.). Retrieved from https://www.rba.gov.au/education/resources/explainers/the-global-financial-crisis.html

Kosakowski, P. (2019, June). The Fall of the Market in the Fall of 2008. Retrieved from https://www.investopedia.com/articles/economics/09/subprime-market-2008.asp

Pilkington, E. (2020, March). US sales of guns and ammunition soar amid coronavirus panic buying. Retrieved from https://www.theguardian.com/world/2020/mar/16/us-sales-guns-ammunition-soar-amid-coronavirus-panic-buying

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Dahye Koo
Editor
Anuk Kariyawasam
Writer
Emily Hartley
Editor

Hi everyone! My name is Emily and I am a current penultimate year student studying Bachelor of Commerce with majors in Finance and Economics. As a digest writer at CAINZ, I am able to tie together my childhood passion for writing and the qualitative and quantitative aspects of finance and economics. I am excited to deliver to you a range of articles throughout my time as a writer.

Sean Reid
Writer