How to Survive a Financial Crisis

20

Oct

Posted by Dcirrus No Comments on HOW TO SURVIVE A FINANCIAL CRISIS Uncategorized

The Covid-19 pandemic has not only impacted the world’s health scenario but has had grave consequences on the global economy as well. A World Bank Report states that the Global Economy will shrink by 5.2 % in 2020. According to an analysis by KPMG, the world GDP is not expected to return to December 2019 levels until the end of the 2021 Q2 (if most economies have already faced their Covid peak and don’t face another wave of infections) or 2021 Q3 (if, to be more pessimistic, most economies of the world experience a second wave as well –which may be painting a rather bleak, but realistic scenario).

The USA, which is the worst-hit country in the pandemic, has undergone massive layoffs, with new applications for unemployment insurance at more than one million a week, only in the month of July (according to The Atlantic). This shows that companies are not doing well enough to keep their employees on board. Additionally, a fall in demand is predicted to have a very slow recovery. This is because the economy as a whole, including consumers (which is nothing but everyone in an economy), has taken an impactful blow from the large unemployment digits and will take time to get back to their original demand levels. This will in turn, again impact the equilibrium supply and employment levels (a vicious cycle), both of which show the general health of firms in an economy.

Even though the recession due to the pandemic is predicted to be the worst of all that the world has seen to date, it would only help us to have a look at how the economy was impacted by the past crises of similar heights.

In the above figure, it can be seen that the two highest numbers of Establishments Exit are in 2002 at around 7,50,000 and 2009 at around 7,20,000 which were right after the start of two of the most significant economic downfalls, The Dot Com Bubble Crisis, and the 2008 Global Financial Crisis, respectively. It shows that most bankruptcies have taken place right after a financial crisis. Reasons for that can be – (a.) Drastic fall in consumer demand, (b.) Credit Contraction, (c.) Falling stock prices, (d.) Supply chain disruptions, and more. According to The Fortune – some of the largest bankruptcies occurred in the oil & gas, aviation, retail, and mining industries.

The below figure shows that the only two times there was a steep rise in Unemployment Rate levels after the fall in the 90s was right after the two financial crises of 2001 and 2008, with the highest average Unemployment Rate figures from 2008 – 2013. It took the US around 7-8 years to get back to its pre-crisis unemployment levels.

The Unemployment Rate doesn’t only show the number of people in the labor force unable to find work, it also shows the inability of companies to hire workers. Instinctively, it is a pretty good indicator of the financial health of a company. According to the Bureau of Labor Statistics, the (seasonally adjusted) Unemployment Rate in the US in April 2020 was a startling 14.7%, with a gradual fall to 10.2% in July (which is still quite high). This clearly shows the poor financial condition of companies in the US because of the pandemic.

Larger companies are expected to survive the pandemic and rise steadily, while start-ups are expected to face more difficulties. Getting funding is expected to get more and more difficult.

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