Insight

The Effect of Economic Inactivity on the Global Economy

Foreign exchange in 2020 could best be defined by fear and unprecedented central bank action. Most forecasts were out the window by the end of March, due to the COVID-19 pandemic. The resulting panic caused the highest volatility ever experienced. Not only that, but COVID ruined the ability for us to look back into 2020’s Q1 and say that anything was correct about where we saw the year going, making forecasting difficult for some time to come.

You didn’t need a PhD in Economics last year to realize that economic inactivity would affect the world dramatically. What happened to the global economy as a result of economic inactivity in 2020? As we begin 2021, it’s still uncertain how the pandemic will play out, but we can take a look at what we know so far.

How We Got Here: 2019, and the First Quarter of 2020 

In 2019, the world went through commercial and business upheaval and a war on trade. Much of the trade freedoms and goodwill the U.S. had built for a decade were erased by the end of the year.

We came into 2020 trying to make peace with what 2019 brought us — then COVID arrived. This was a true “black swan” event that hit as a complete surprise. Even as late as March 31, 2020, the Atlanta Fed’s GDP forecast stated they still expected growth at 2.7% for the year. At the same time in the private sector, the Blue Chip Consensus forecast — from 10 of the largest banks in New York — predicted the GDP to grow at 1.3%.

Obviously, that didn’t happen. When the virus hit and we realized that we needed to stay home, the dollar immediately strengthened. Because of the dollar’s dominance in the market as a safe haven currency, every other currency weakened as the crisis deepened and nations wrestled with appropriate responses to the rapidly evolving situation.

Coronavirus: What Happened When the World Shut Down

One thing that’s unique about the Coronavirus is that it’s a physical threat, not just an economic one. The virus created a situation in which Americans cannot go to work. Most of us are home, working remotely or laid off. So much in the world is invoiced in US dollars, which has created tremendous havoc for the value of other currencies. 

We saw people gravitate towards the traditional, like the U.S. dollar, and even household staples like toilet paper. BitCoin and other instruments in the blockchain technology had a slow start to the year, though they finished near record highs. 

The effect of the pandemic on the economy was sudden. To give you an idea of how rapidly things changed, look at unemployment filings in 2020. According to the Department of Labor, seasonally adjusted initial claims were 212,000 for the week of January 2, 2020. By the end of the quarter, unemployment claims peaked at 6.86 million claims the week of March 26, 2020.

To give you a sense of perspective, the peak of unemployment filings during the financial crisis of 2008 was 665,000 claims in March 2009, and the previous all-time high was 695,000 claims in October 1982. 

Though we’re recovering to a certain extent, in the first week of January 2021, there were still 787,000 claims. Our current situation remains volatile and uncertain. 

How Long Will This Last?

The longer our economic inactivity remains, the worse the situation is going to be in terms of GDP decline for 2021. 2020 GDP was -5.0% in Q1 and -31.4% in Q2. A record rebound of 33.4% in Q3 was largely due to more than $3 trillion in pandemic relief. As virus cases rise and stimulus funds dwindle, the economy is slowing again. 

The question becomes: how long will this economic inactivity — and the resulting volatility — last?

It’s hard to make predictions because this is absolutely unprecedented. The very nature and threat of inactivity in the economy means that governments have to act as aggressively, if not more so, than they did during the 2008 crisis. 

No matter what the immediate future brings, TEMPUS is here to help you. 

Juan Perez Senior FX Trader and Strategist Monex USA

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