top of page

COVID-19, has caused a major economic crisis.

Dernière mise à jour : 19 juil. 2020

Since the beginning of March and the rapid expansion of the coronavirus (COVID-19), the measures taken to combat it have taken a big hit on the financial markets. Indeed these markets were and are collapsing continuously and very quickly. Thursday March 12th was a fateful day for the world economy. Let's take the example of the Bitcoin, the famous crypto monnaie, which in a few minutes lost 20% of its value and fell below the €5000 mark, something that hadn't happened since May 2019. An economic crisis is a drop in production which, in turn, leads to an increase in unemployment and then a drop in purchasing power and consumption. An economic crisis thus becomes a social crisis and its repercussions can be global which has been the case these days. An unprecedented economic crisis happened in the 20th century (the crash of 1929). We will now go over what an economic crisis really is, then we will look back at the economic crash of 1929 and finally we will look at the current state of affairs in the world.

coronavirus

We often hear about economic crises, whether it's through the media or the government. But we do not always know exactly what that means. So what is an economic crisis? What are the issues and consequences?


An economic crisis is the consequence of a sudden downturn in economic activity leading to an economic depression. A depression is a period following an economic crisis that results in a significant and lasting reduction in production. Growth is slowed down and unemployment sets in. During a period of economic crisis/depression, there is a strong gap between production and consumption. This leads to increased unemployment, bankruptcies, lower GDP and lower purchasing power. It becomes a domino effect that sets in on the economy.

A crisis is a source of social and political tension. A crisis can potentially create health problems due to lack of resources and care, which can then lead to the outbreak of illness or the death of citizens.


The brutal slowdown of the economy can be triggered by many reasons (natural disasters, real estate market, health problems, ...) and the whole world is in a precarious equilibrium. An economic crisis occurs on average every 2 years and can or cannot be global. The last recorded one, was Argentina in 2018 where the Argentine peso had lost 50% of its value.

Since the 19th century, there have been many depressions. The most known one is the one triggered by the stock market crash in 1929. A crash is a sudden and massive sale of shares causing a fall in prices.

This crisis is surely the most important in history. It weakened many countries and

contributed in particular to the accession to power of Adolf Hitler in Germany.


It all began on October 24, 1929 in New York, when the stock market collapsed. A collapse due to a rise of more than 300% in the usual prices. As a result, massive resales of shares were made. The speculative bubble then burst, leading to a gain in purchasing power of the currency and lowering prices in general. As a result, the recession was dragged down to about -4% that year.


Graph illustrating the fall in financial prices between October and November 1929.

The Dow Jones index is a U.S. stock market index and we can then see a large and sudden collapse of the stock market up to 29 Dow Jones indexes.




This deflation led to a significant drop in the New York stock market, and then by domino effect, to the whole world. Teletypewriters could no longer transmit the stock market price live because it was falling so rapidly.

The consequences of this crash were disastrous. The Depression lasted until the Second World War, which in part is why historians named this period “The Great Depression”.

It had a great impact on the consumption of the population and investments, which led to a banking crisis and an explosion of unemployment, because small businesses could no longer cope with this crisis and repay their loans in full.

France was affected by this crisis with 3 years of delay and therefore decided to withdraw to its colonial empire to overcome the crisis.


Currently, the world is preparing to face an economic crisis linked to the pandemic caused by the coronavirus. Indeed, several countries are at a standstill and there are already some economic impacts, especially on the price of oil.

China, the country initially affected by the Coronavirus (COVID-19), accounts for 30% of everything created around the globe and is at a standstill in production and export. In this way, it is easy to understand the economic impact that this standstill has on the world. In addition, measures taken to prevent the development of this virus have entered into force in many affected countries and will soon be applied to other States as a preventive measure. Quite radical measures have been taken, such as the total confinement of a country's population with bans on leaving the country except in case of necessary need, such as to go and buy food or for medical treatment... Strict rules that have already been followed in China, (which is slowly beginning to return to normal life) and Italy. In France at the time of publication of this article, all bars, discos, restaurants, cinemas and other gathering places not essential to the life of the country were closed until further notice. Schools are now also closed for an indefinite period of time (this has not happened since 1939 because of the war). As a result, correspondence courses were introduced and many educational publishers made courses available free of charge to ensure that pupils followed the curriculum as best they could at their school level.


The set of rules such as the containment, the shutting down of companies, the decrease in consumption..., then have a real impact on the world economy.

The fear and uncertainty of shareholders on the markets, lead to the sale of shares in a lightning manner and a clear drop in prices; example: on March 9, the price of a barrel of oil collapsed by 25%.

The CAC 40 is now experiencing a spectacular collapse in its price, as shown in the graph below :

The legends MMA(20), MMA(50), MMA(100) correspond to the moving average over 20 sliding days (1 month of quotations), over 50 sliding days (10 weeks of quotations) and over 100 sliding days (5 months of quotations).

A moving average is the average value of an asset over a given period. On the stock market, an asset has 4 values for each period : the opening price, the closing price, the highest price and the lowest price.

The longer the period, the smoother the curve and the smoother the variations.

In the face of all these economic problems, most countries have put in place massive plans to try to mitigate the effect of containment on companies, but this is still too little.

An economic crisis can be concentrated in one industry and can also affect the whole world, just like the current crisis just beginning.

Indeed, it is the exporting and importing countries, i.e. the North, that are the most affected by the expansion of the virus, which explains the global imbalance in the economy. The South, being less affected by the virus for the moment, is more impacted by the economic crisis.


See the graph of countries affected by VIDOC-19 on Monday 16 March 2020 :


Recovering from an economic crisis is complicated. Even if recovering from an economic crisis is a complicated thing due to the increase in unemployment, the decrease in consumption and the uncertain time for each country to recover, we must continue to take the necessary precautions to limit the damage of VIDOC-19.

Stay quarantined in your homes and wash your hands regularly, and only call emergency in case of emergency.

Comments


bottom of page