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The Economic Crash of 2020

The adverse economic event precipitated by the COVID-19 pandemic

What is the Economic Crash of 2020?

The economic crash of 2020 was precipitated by the COVID-19 pandemic. The sudden appearance of the virus, its rapid spread, and uncertainty about how communicable and how lethal it might be sent financial markets and economies spiraling down worldwide.

 

Economic Crash of 2020

 

Summary

  • The Economic Crash of 2020 was caused by the sudden worldwide spread of the COVID-19 coronavirus, which originated in Wuhan, China.
  • The S&P 500 Index lost one-third of its value within just a few weeks after the first coronavirus case being confirmed in the United States.
  • The “shelter in place” lockdown in the U.S. has led to 20-30 million individuals filing unemployment claims.
  • European nations have been impacted similarly to the U.S., with Italy, Spain, and the UK being among the most heavily affected countries.
  • Nearly all developed nations have responded to the economic upheaval by slashing interest rates and handing out massive financial aid packages to both individuals and businesses.

 

The Market Crash

At the beginning of February, the S&P 500 Index was making a new all-time high above 3,300. By the third week of March, the index had slumped all the way down to around 2,200 – in short, losing approximately one-third of its value in just a few short weeks.

However, by the first of May, the index had recovered more than half of its decline, rising back up to the 2900 level. However, economists and market analysts remain uncertain as to whether the crash has been weathered, and if a recovery, at least in the stock markets, has begun, or whether there will be a secondary down wave in stock prices.

 

How the Economic Crash of 2020 Unfolded

A snowballing or domino effect meant that every new bit of bad news regarding the disease or its effect on the economy triggered more negative effects.

The primary response to the pandemic, the main attempt to contain its spread, has been the institution of widespread quarantine, or, as the phrase that’s come to be used – “sheltering in place.” Most of the developed nations in the world have effectively put both their citizens and their economies on lockdown:

  • Only essential businesses – such as hospitals, grocery stores, and pharmacies – have been allowed to remain open.
  • Schools and universities closed, leaving millions of students at home with their parents in the middle of a school year that will likely never be completed. Many school districts continue to teach via distance learning.
  • People are only allowed to travel for essential purposes, such as grocery shopping; later regulations have required the wearing of face masks in public to help prevent the spread of COVID-19.

 

Is the Cure Worse than the Disease?

The consequences of the response to the virus – the government’s efforts to contain it – have been nothing short of catastrophic economically. By the end of April 2020, approximately 30 million Americans had filed for unemployment benefits.

With all non-essential travel restricted, the oil market crashed into negative numbers, with oil futures for a brief period of time selling at close to minus $40 a barrel. Even when the market more or less stabilized, the price of oil was just barely above $10 a barrel. Before the crisis, West Texas Intermediate crude oil had been selling around $50 a barrel.

How unstable is the oil market? Now that major oil-producing countries in the Middle East, many of whom are almost completely dependent on the oil economy, have been rocked by the sudden plunge in prices, some fear they may choke off supply in an attempt to boost prices, and send the per-barrel price zooming back above $100 a barrel.

After two to three months in lockdown, with many people having no idea when they might be allowed to go back to work, patience with the quarantine procedures began wearing very thin. Citizens began to protest the extreme lockdown measures. The attitude of many was increasingly, “It won’t do me any good to avoid getting the virus if I go broke, can’t feed my family, and lose my job, my house, and my car.”

In addition, the overall economy isn’t capable of surviving an indefinite quarantine. The longer the lockdown lasts, the more businesses that will fail, and the more jobs that will be permanently lost.

 

Gold Regains its Glitter

Gold and silver prices have risen significantly, and the demand for precious metals has increased so sharply that many wholesalers no longer have any gold or silver in stock to sell. Some precious metals dealers who do have coins or bullion in stock have been selling plain bullion bars for as much as 20%-70% over spot prices.

The basic monetary policy adopted by most countries in response to the Economic Crash of 2020 appears to be what some have termed, with perhaps a note of graveyard humor, “quantitative easing to infinity.” Benchmark interest rates set by central banks are near zero or even negative. The U.S. Congress has passed a series of coronavirus financial aid and rescue packages that already exceed the total federal government expenditures for the entire year of 2019, which was roughly $4.5 trillion.

As people become increasingly unsure – read: worried – about the eventual effects on currency values as governments run non-stop money printing presses, interest in Bitcoin and other cryptocurrencies has increased noticeably. Bitcoin’s price on the first of February was around $9,300. Although cryptocurrencies initially plunged along with the rest of the financial markets – Bitcoin sunk to just below $5,000, losing nearly half its value – they began to rebound in April and, by the end of that month, it was back up to $8,800.

 

No Amount of Financial Aid Seems to Be Enough

Financial aid is being dispensed in different ways and through a variety of channels. It includes direct financial aid to citizens and substantial expansion of unemployment benefits, along with hundreds of billions of dollars spent on healthcare initiatives and financial aid to both small businesses and entire business sectors – such as the travel and tourism industries.

However, not even the government pumping huge amounts of cash into the economy seems to be enough. In fact, trillions of dollars in aid have somehow managed to appear to be like little more than a drop in the bucket.

For example, the primary direct financial assistance to individuals and families in the U.S. has been dispensed in the form of $1,200 checks going out to every taxpayer. However, that amount of money won’t do much more than help people to cover their primary housing and food bills for just one month.

The government’s initial rescue package aimed at helping small businesses that are largely out of business until further notice, and which totaled more than a trillion dollars, was all gone, used up, within just a couple of weeks.

The direct expenditures on healthcare are virtually incalculable and are only expected to continue to rise. Still, even in the darkest economic scenarios, there are a few bright spots. Predictably enough, the healthcare sector is booming, as are certain areas of the tech industry, such as work-at-home apps and streaming services for video and games. The stock prices of some of the biotechnology companies working on either a vaccine or a treatment for the coronavirus show 12-month returns of 400%+.

 

Going Forward – What Does the Economic Crash of 2020 Mean for the Future

While many economic analysts give out tentatively hopeful forecasts for rapid economic recovery once the virus quarantine restrictions are lifted, the simple facts are that the final economic repercussions of COVID-19 are impossible to estimate.

No matter how much financial aid governments offer, there are likely to be tens, if not hundreds, of thousands of small businesses that, having had their doors forced shut for months, will simply never reopen. The upheaval in unemployment numbers is also likely to continue for quite some time, as former employees of those thousands of small businesses scramble to find new jobs.

Fresh high school and university graduates aiming to enter the full-time workforce for the first time are going to be faced with massive competition from countless other more experienced workers.

In sum, the eventual full extent and the nature of the Economic Crash of 2020 remain to be seen. The coronavirus pandemic has presented the world economy with a dire situation, unlike any that it has had to face in modern times. The interdependency of a global economy amplifies the effects felt in individual countries.

It is, therefore, impossible to foretell what the state of various economies will be when it is all shaken out. It is equally impossible to predict how long it will be until things approach anything that looks remotely like “normal.”

A recovery in stock prices is no guarantee of widespread economic recovery overall. The one fact not in doubt is that we will be dealing with the effects of the Economic Crash of 2020 for quite some time to come. There may come a point at which we look back at the Global Financial Crisis of 2008 as “the good old days.”

 

Additional Resources

Thank you for reading CFI’s report on the Economic Crash of 2020, as of the first week in May.

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class financial analyst and advance your career to your fullest potential, the additional resources below will be very helpful:

  • Asian Financial Crisis
  • Cryptocurrency
  • The Great Depression
  • Structural Unemployment

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