The coronavirus has now hit Malta and all member states of the European Union have reported cases of the disease. The country which has been worst hit is Italy, which has now locked itself, in an effort to contain the spread of the virus. The economic impact on Italy is expected to be severe and it is likely the country will go into a recession.
The Maltese economy will not be immune to all this, as it is a strong possibility that as the virus spreads in other countries, we will suffer negative consequences. The openness of our economy has helped us to progress. However, it has also made us vulnerable to events that happen beyond our shores and which are completely out of our control. At the time of writing, the government has banned travel between Malta and Switzerland, Germany, France and Spain.
We should not be alarmist as we could talk our economy into a recession. However, we need to be conscious of the risks involved. Taking the example of Germany, one notes that this country has not wasted any time in launching emergency measures worth billions of euros, with the German government declaring it would do all that is necessary to safeguard jobs. However, let us proceed with order. The week began with a crash, so much so that last Monday is being called ‘Crash Monday’. The price of oil dropped by some 30 per cent and stock markets around the world took a tumble. There was a rally in prices after that, but the financial markets are still very jittery. Billions have been wiped off the values of stock exchange indices.
Analysts are saying the drop in stock prices which occurred last Monday, was last seen in 2008, when the bank Lehman Brothers collapsed, which subsequently triggered a crisis in the financial markets, and eventually a very severe economic recession. These analysts are now saying things are expected to get worse before they get better.
We need to put in place measures that safeguard families and businesses
This caused investors to move towards safety and minimise risks. The most obvious choice is government bonds of the world’s leading economies. Thus the interest rate on a 10-year US Treasury Bill has gone down to below one per cent. Short-term government debt of a number of countries now carries a negative interest rate, meaning investors are now paying money to hold government bonds (at least in the short term), as they are considered a safer investment than holding private sector equity. There is also pressure on the main central banks, like the European Central Bank and the Bank of England to cut interest rates. The US Federal Reserve had already implemented an emergency rate cut last week but is expected to cut interest rates even further.
Whether this is panic or sheer hysteria is for observers to decipher. The point that needs to be addressed is what sort of response will there be to this real threat of global economic recession. Will governments agree to cooperate, or will they be guided by self-interest and seek to go it alone? Will they adopt policies that will be protectionist, or will they adopt a more open collaborative approach? If governments adopt protectionist policies, the threat of a global economic recession will increase even further.
Over the last years some world political leaders have ditched multilateral cooperation. We need to accept that the threat of a recession caused by coronavirus requires a multilateral response.
It has already been shown that the virus can cross borders freely, no matter how much such borders may be closed. Therefore the ‘go-it-alone’ approach will simply not work.
I go back to the local situation. The international economic environment is likely to become more challenging.
We need to put in place measures that safeguard families and businesses. We cannot wait for the crisis to hit before we act. Pre-empting a recession is easier than fighting it after it hits us.