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Home > Legal & Financial > A hand grenade in a bloodbath

A hand grenade in a bloodbath

As The Islander closed for press for this issue, the world was on a steady march towards armageddon, or it seemed that way anyway.

Coronavirus, or Covid-19 to christen it with it’s official title, had established a stronghold in Europe and elsewhere, and was multiplying rapidly. Italy had just announced a lockdown of the entire country and their 60 million citizens, with other leaders, sages and luminaries predicting things would get worse before they got better. The stock markets were in turmoil with billions being ticked off the values of everything on the board.

By the time you get to read this you may well be having a chuckle about why we all worried so much, or we maybe eating each other to survive, or probably somewhere in between so apologies in advance if what follows is way off the mark.

Covid-19 is a destructive, stealthy force, sufficiently mild in its effects on 90%+ of those infected, that many will not realise they are even ill, and will merrily continue their lives while dangerously infectious, for a small percentage of the elderly, or ill or both, it is fatal.

The ability to spread this virus at speed has led to shutdowns of schools, workplaces, gatherings and transport in the worst affected areas and this is proving to be ruinous for the local economies with potentially disastrous consequences for the global economy as a whole.

Covid-19 was first detected in Wuhan in China’s Hubei province, the response from the Chinese government was swift, locking down factories and sending people home. It seems, at least to have minimised the contagion, let’s hope so, but it has had a catastrophic knock on financial effect.

China’s rapid economic growth over recent decades means that it is now indispensable to the global economy, particularly manufacturing. China now makes a third of the planet’s goods in its vast factories. It is the second largest economy, and its role, not just in finished goods but in the global supply chain has exposed some pretty major weaknesses in some pretty big name firms. China particularly specialises in the production of electronics, making almost all of the world’s smartphones and tablets, regardless of which logo ends up on the back of it. Production of iPhones is down 75%. China also makes nearly 10% of global auto electronics, huge quantities of components for heating systems, telecoms gear, luxury clothing, retail clothing, and so it goes on. The industrial shutdown in China is not just bad for China, it has closed, or heavily restricted industry the world over, reliant on Chinese finished goods, or components to finish their own goods.

Chinese people are also the world’s biggest, and big spending tourists. 150 million of them in total, spending nearly three times the average holidaymaker, and it seems that a lot of them are staying home, for now at least. So the planes, ships and traffic taking people to work and holidays, the factories and hotels that are closed, and the transport needed to export goods are now mostly still and silent. As a result the global appetite for oil has fallen off a cliff and the price crashed.

Oil cartel OPEC and a few invited guests gathered to agree to cut supply, a common move designed to move the price back up into comfortable profit for most, but unusually there was no agreement, the wounded sides retreated, and opened the taps in an all out oil war. As one financial analyst put it, ‘It’s like dropping a hand grenade into a bloodbath’.  The idea appears to be to see who blinks first as the price tanked further, with prices heading for the mid 20s dollars a barrel. While you might welcome a few cents off a litre of fuel, and a couple of airlines might welcome a reduction as a rare piece of good news for the beleaguered sector this is mainly horrendous news, particularly for the US economy.

American oil is a bit more costly to extract, particularly the shale oils from fracking, so they need a high oil price to turn a profit at all, so sustained lower prices will wipe out profits, close wells, put workers in the welfare lines and wipe the smile of Uncle Sam’s GDP figures. Cuts in oil prices usually have the compensating factor of stimulating demand, but people aren’t flying, or driving, or running their factories, the demand just isn’t there.

The upshot of all this economic chaos theory was a day of record falls in stock indices, and a world potentially tipping back into recession. Central banks have their hands tied, unlike the last big one in 2008 interest rates are at, or virtually at zero, financial stimulus has run out of steam, and rate cuts are not going to get people back on planes if they are concerned about their safety.

Things will get back to normal, they always do in the end, but it’s going to be a rough year or two even if you manage to give Covid-19 the swerve.

If you want to look for positives, perhaps the world will figure out that many of us can work just as well at home, as in the office and we can all move out of our congested cities, fistbumps are going to be acceptable for the middle aged, and we are going to get really, really good at washing our hands.

Stay safe.

 Phill McCoffers