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Why the coronavirus crisis might not be as bad as 2008; and why it might be worse

Alastair Ford helps make sense of the longer-term implications of the coronavirus

prices financial

In percentage terms, the decline in market valuations on both sides of the Atlantic has been either nearly as bad or worse than it was during the financial crisis of 2008, according to analysis published by Liberum this week.

Thus, in the first two months since the coronavirus outbreak, US equities, have dropped by nearly 30%, as against the 40% drop endured in 2008, while European stocks have dropped by 30%, roughly on a par where they were two months into the global financial crisis.

Things may get worse

And if the patterns followed in 2008 are anything to go by, things may well get worse before they get better. After initial precipitous drops in 2008, US and European markets then recovered somewhat as the panic subsided, only then to decline at a gentler rate but no less significantly, to levels slightly lower than those to which the initial selling had taken them.

But are the two crises comparable in that regard?

The epic scale of the financial shock certainly is comparable. This is, without doubt, the most serious financial crisis the world has seen since 2008, and may yet surpass it for severity.

The open question though, is how long it will last?

2008: Financial system was compromised 

Back in 2008, there was a clear understanding that the financial system itself had been fatally compromised. And that in turn lead to an ongoing sense of uncertainty that lasted, in some sectors, for years.

This time around, there’s no such underlying problem: the initial causes of the crisis lie outside of the financial system. In broad terms, the mechanisms that allow national and transnational economies to function are still in place.

And that advantage has allowed governments freedom to maneuver that they didn’t have in 2008, when the domino effect of the collapsing banks threatened to undermine the very efficacy of credit itself.

On the other hand, the effects of the crisis will undoubtedly run deeper. Back in 2008 we witnessed a horrific inversion of the famous trickle-down effect: that when banks collapsed the corresponding destruction of wealth seeped down into the wider economy, and growth turned to recession.

This time around though, the effects of the reduction in economic activity have been immediate and have run right through society, from the very bottom – people like music teachers, contract caterers and restaurateurs – to the hedge fund managers and corporate warriors at the very top. In the middle, housing sales are stalling and productivity will necessarily drop off a cliff.

This shock is sharper and more immediate, and this is borne out in the pattern of the relative stock market falls. In the coronavirus crisis, the falls were more precipitous and steeper than they were in 2008. It remains to be seen what the after-effects will be, how many dead cats will bounce, and whether small changes to the oil price, like the one we’ve witnessed towards the end of this week, will herald anything more than false dawns.

But there are bright spots

Certain health companies are doing very well, not surprisingly. And the low oil price is helping gold miners boost margins even as the gold price strengthens.

On the flip side of that, if Mr Putin and the ruling Saudi elite decide to reach some sort of accommodation the oil price could jump and the oil majors that have been oversold.

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