What is the Impact of the COVID-19 Pandemic on Global Finance
The international financial system has been a beacon of strength—banks and fintech are assisting in providing aid to small households and businesses in need—and an area with potential risk, given the record-high levels of market turbulence and the growing concern over credit losses—as the economic and human repercussions of the COVID-19 pandemic have become apparent. Governments, central banks, lawmakers, and international organisations have responded quickly to handle the collapse of the economy and its financial consequences. Still, issues remain over how policy ought to change in order to maintain financial stability.
COVID -19 & Global Economy
The Covid-19 pandemic undoubtedly had an impact on our daily life as well as the global economy's health. The effect on financial markets, however, has been more complicated.
First off, stocks seem to have considered the virus's economic repercussions. The Covid-19 crisis last year set off one of the longest recessions in history, resulting in a 3.6% year-over-year decline in global growth. Following the first stock market selloff, global stocks delivered a 15% gain in 2020.
The sheer amount of stimulus, both monetary and fiscal that governments throughout the world gave undoubtedly helped markets.
As a result, stocks were unconcerned about the bad economic effects of Covid-19 as long as there was a lot of official support. But if you dig a little further, the virus has significantly impacted the success of specific equity types and sectors.
Second, it has been difficult to make investments in nations based on how successfully they have managed the Covid-19 outbreak and the vaccination programme. We definitely observe a trend in which the nations with the highest growth projections have typically been the ones that have taken the lead in the vaccination race.
However, in these markets, this has not resulted in higher equity returns. The association between immunisation rates and economic expectations has, however, been more clearly demonstrated in money markets.
Potential Impacts on Financial Sectors
The timing and size of economic policy initiatives have been significantly impacted by financial markets. With significant liquidity injections into the financial sector and, on occasion, the non-financial corporate sector, monetary policy efforts have instead centred on quantitative easing. This focus on supporting the financial sector and financial asset prices is similar to central bank actions during the Great Financial Crisis. It demonstrates close ties between central banks and participants in the financial markets as well as between the general government and financial elites.
Comparing sectoral indices of the stock market is one method of estimating the likely effect of the global epidemic on the financial industry. Unsurprisingly, despite the fact that all indices fell, there are significant disparities in how different industries performed. The largest global loss was in the healthcare sector, at 10%.
In contrast, the global energy sector suffered a loss of 33% due to declining oil and gas prices. Real estate deals are not common in situations of fundamental uncertainty and are nearly impossible during lockdowns, with equities in the sector plummeting by 24% globally. The second worst-affected industry was financials, encompassing banking, insurance, and specialised financial enterprises.
The epidemic might hasten shifts in consumption habits. While bank branches may remain open in many nations, consumers (especially non-millennials) have been compelled to use online banking more frequently and avoid branches and ATMs. People are significantly more likely to keep using digital channels to acquire financial services when all social barriers and limitations on mobility are removed. In addition, governments are going to continue to increase their encouragement for digital finance as a means of creating more digitised and robust economies. Banknotes and coins not only aid the dark and grey economies, and thus tax avoidance; their unsanitary nature will now receive much greater attention.
It is true that the stage of digital evolution in the finance industry differs substantially from nation to nation, often not in a way that is strongly correlated with economic success.
Thus, the pandemic is anticipated to cause substantial changes in the way financial services are provided, with retail banking taking the lead. Whether the creation and use of cutting-edge financial technology benefits established banks as they improve their digital banking tactics, FinTech start-ups, or major technology companies entering the finance sector will depend on a number of variables, such as regulation, and can vary from country to country. FinTech companies have a number of difficulties, including their tiny size and insatiable appetite for investments and capital, which will not be readily fulfilled during the impending recession, despite the growing need for their technological solutions.
Overall, Covid-19 has really mattered more to some markets than others, such as its intrinsic style and allied industries. In addition, currency movements rather than equity markets have been a stronger indicator of the vaccination roll-out's performance across nations. In general, it should not be overlooked that the appearance of new variants or a rise in the seriousness of the variant known as delta might still pose a risk to the global economy and financial markets.