Coronavirus: Lack of leadership may lead to L-shaped economy, markets may suffer badly

  • Most global leaders seem to fail in dealing with coronavirus.
  • On-off openings of the economy may trigger a deeper recession, followed by inadequate recovery.
  • Markets may follow with another crash and an unconvincing comeback.

Will the virus cause a V-shaped economic recovery? Those predictions seem rosy and are fading away, with a bathtub-shape – an extended U – sounding more logical as time passes by. However, even that may be too optimistic. An L-shaped economy – one that crashes lays low for longer – has higher chances, and it depends on leadership.

The world's largest economies are the US and China, and both suffer substantial shortcomings, which may cause a protracted and patchy recovery. The eurozone is in third place, and it also suffers disunity.

The importance of leadership

In times of crisis, leaders and governments are unable to make the problem go away entirely, but their approach can make a considerable difference. It starts by taking the issue seriously and not trying to brush it aside by downplaying it or ignoring warnings. Good leaders listen to as many experts as possible – at home or abroad. That data – that may change later – helps make the best possible decisions. 

Leadership also means clear communications to the public of what is known, what the government is doing, and why, and what is expected from them. Such moves raise the probability of compliance and understanding.

In regards to coronavirus, such skills are necessary to convince people to stay at home and follow the guidelines, knowing why it is required and what the endgame is. Apart from the lockdowns, governments announced measures to mitigate the economic fallout and with a better understanding of the sacrifice and the compensation for that burden – the chances of a sharper recovery rise

When shutting down the economy has its desired effect of curbing the spread of COVID-19, those exit strategies may be deployed as initially planned– or revised according to the country's own experience of lessons learned from other places.

A gradual relaxation of restrictions requires rapid testing capacity and contact tracing. Readying laboratories and setting up mobile probing stands to ensure fast testing makes people feel safer.and more confident to spend and boost the recuperation from the economic shock. 

Coronavirus sequel is far more devastating


The one thing that is worse than the economic shock from coronavirus is a potential second wave of infections.

Good leadership convinces the public to hunker down and provides hope for the future return to normal. Sub-par governments never entirely sell the need for staying at home. In both cases, the news of a second lockdown may have devastating implications. Some may think that the disease is unbeatable and the drop in confidence among businesses and deal a deadly blow to the economy.

Desperate times may also lead to desperate measures, from an increase in suicides to civil unrest that may further dampen economic activity. Even without apocalyptic zombie scenarios, setbacks in fighting the pandemic can be devasting. 

Examples of such leaders are Germany's Angela Merkel, and South Korea's Moon Jae-in, who have both deployed testing talked calmly to the public and are gradually and cautiously lifting restrictions. Merkel is enjoying a sky-high at 79%, and Moon's party won a landslide victory. Both economies are on their feet.

Is the leadership of the world's largest economies up to the task?

The US in disarray

President Donald Trump said coronavirus is the Democrats' new hoax in a rally on February 28 and only changed talk in the second week of March, downplaying the damage. He said nobody could have predicted it.

However, his adviser Peter Navarro warned about the virus's impact in early January. Navarro is a known China hawk, and his memo did not change Trump's policy. Around the signing of Phase One of the Sino-American trade deal – something that sounds as remote as Brexit now – the adviser's words sounded like the boy who cried wolf. The preferred focusing on the strong economy at the beginning of an election year and overlooked the danger to the economy. 

Trump preferred said Chinese counterpart Xi Jinping was doing a good job in combating the crisis. Adhanom Ghebreyesus, Director-General of the World Health Organization, praised both leaders at the same time. Nevertheless, Americans working at the WHO was in touch with the White House and provided updates on the disease.

The US and South Korea both confirmed their first cases on January 21. While Seoul used the WHO's recipe to deploy tests rapidly, the US Center for Disease Control (CDC) preferred developing its own probes, which proved faulty and only later began producing trustworthy tests. 

This waste of precious time is not only the leader's fault, but his erstwhile National Security Adviser John Bolton disbanded the NSC's global health security office in 2018, weakening America's ability to respond to a pandemic. 

On January 23, China locked down Wuhan with its population of 11 million and later the Hubei province that surrounds it with 50 million inhabitants. Yet, the White House settled for banning flights from China and claimed that everything is under control. China's move seems like a thick hint to what was going on on the other side of the Pacific. 

Only on March 13, Trump declared a national emergency, when COVID-19 had already spread in the community like wildfire, including around where he grew up in Queens, New York City.

The US' confirmed death toll surpasses all other countries, and over 22 million Americans lost their jobs at the time of writing. 

He later clashed with governors on several issues, from ventilators needed to treat the worst cases of COVID-19 and then testing, much-needed for reopening the economy. States were initially competing to obtain medical equipment instead of the federal government coordinating the response. Phil Hogan, the Republican governor of Maryland, used his wife's personal ties to get coronavirus tests

Trump's clash with governors – including encouraging protests that resulted in insufficient social distancing – sends a mixed message that also weighs on confidence and the economy. Looking for shortcuts such as touting hydroxychloroquine – an anti-malaria drug that has been inconclusive with treating coronavirus patients – creates false hope. In turn, premature expectations – just like a potential second wave – may deal another blow to the economy.  

Trump's approval rating initially advanced – a "rally around the flag" phenomenon, but remained negative. That effect faded quickly. His attempts to shift blame between the Democrats, China, the WHO, and immigrants seem to have limited success in battling the disease or support his public backing.

The damage to the economy is here to stay and potentially worsen with such leadership

China – Covering up and causing distrust

Doctors in Wuhan warned of a peculiar cluster of pneumonia cases back in December 2019 – hence COVID-19. The Communist Party reacted by punishing the medics for "spreading false rumors" and let the disease spread. One of these professionals, Li Wenliang, later died, aged 34. Li's story is one of those that caused anger and that the authorities were unable to silence.

Some officials in Hubei were sacked, and hopes for more transparency rose. However, China's propaganda machine later sprang into action and shifted rhetoric away from soul-searching to blaming foreigners.

China also misled the WHO by denying human-to-human transmissions in early January and delayed a visit by a delegation of the international body. The quick spread of the illness in Europe and the higher death toll also raised suspicions about Beijing's statistics and information it provided. 

China is returning to normal. However, while it can force people to work at factories, Beijing cannot convince the public to shop, go to restaurants, or enjoy other public events. Distrust in the leadership has its economic toll

An authoritarian regime may have better control when it comes to lockdowns, but it is not immune to setbacks and second waves. Suifenhe, on the Russian border, is experiencing an outbreak that both Beijing and Moscow are trying to play down. 

Globally, Beijing's approach –  via the outspoken Global Times English language outlet and others – is of gloat. Authorities are boasting their support to the world, but Chinese firms are charging full prices from countries in need of medical supplies. One example is a donation of hundreds of thousands of masks to Spain, which were sent by train. While that cargo was on its way, Madrid already purchased millions of masks that came via flights from another Chinese company.

Not only is the US becoming more suspicious of China, but also other countries are questioning their dependency on cheap supplies. The US and China were already in the long process of decoupling, and Phase One of the trade deal did only little to rebuild confidence. China's leadership in the crisis will likely accelerate that process.

Less global trade and deglobalization will also take their toll.

Disunited European Union

Crises are opportunities to heal but can also open unhealed wounds. The eurozone never fully recovered economically, nor came together politically after the debt crisis. Brexit triggered a boost in support for the bloc and its advantages, but economic devastation has reopened the north-south divide.

The Netherlands wants to investigate countries that did not build a fiscal margin in the past few years and wants to punish them. Italy, Spain, and Portugal were infuriated that at a time of emergency, there is no solidarity. Germany has been successful at mitigating COVID-19 after years of investing in health – including laboratories able to test for the illness. However, it led the austerity policy that caused cuts to spending on healthcare across the continent

Officials in Brussels seem to acknowledge the existential risk to the monetary union, have tried to calm the mood, and lead an ambitious recovery – perhaps protecting their own jobs – yet without success. Ursula von der Leyen, President of the European Commission – and formerly Merkel's defense minister – said the EU owes Italy and apology. Her deputy Frans Timmermans supported an ambitious €1.5 trillion fund. 

While smaller packages and soothing words are keeping the bloc together, Euroskeptic parties in both the north and south are emboldened by the economic crisis and by nationalistic anger. Italy's Matteo Salvini is riding on Europe's lack of help to his country, and xenophobic parties in Germany and other countries are benefiting from the sentiment that lazy states should not receive any help.

Fear from extremists is causing leaders to adopt stricter stances in European talks while the absence of a massive united response causes governments to spend fewer funds in mitigating the economic fallout. The lack of leadership in coordinating the health response and the economic one is taking its toll in the short and longer terms. 

Global implications

The Sino-American decoupling mentioned earlier – and potentially other falls in the trade may deal another blow to the global economy. That would come in addition to the hardship inflicted in every zone by the leadership failures

Moreover, the eventual endgame of coming out of the coronavirus crisis comes from the health effort. An effective treatment – and preferably a vaccine – would enable a full return to a healthy life. However, the growing international distrust could slow that process.

If China announces it has developed a vaccine, will others trust it? Trump's America first approach may lead to the US first taking care of itself before allowing others to produce the medication. 


Contrary to 2008-2009, leadership is lacking. That implies a slower exit from lockdowns and potentially devastating second infection waves. The international blame game and nationalism are also likely to take their economic toll as the world tries to defeat COVID-19.

Hopes for a bounce-back in the latter part of 2020 or during 2021 may be too optimistic. After an initial downfall – the vertical part of the letter L – the world may remain at low levels of activity. That horizontal part of the letter L is not anticipated by markets and may lead to another wave of sell-offs. As investors look forward, any signs that this pessimistic scenario has higher chances may send stocks tumbling well before the second half of 2020. 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Recommended Content

Recommended Content

Editors’ Picks

EUR/USD stretches toward 1.0900, as US data looms

EUR/USD stretches toward 1.0900, as US data looms

EUR/USD extends weekly gains toward 1.0900 in European trading on Friday. The pair stays supported amid sustained US Dollar weakness, in the aftermath of softer-than-expected US CPI data and the USD/JPY sell-off. US PPI inflation data is awaited. 


GBP/USD refreshes YTD highs above 1.2950 ahead of US PPI data

GBP/USD refreshes YTD highs above 1.2950 ahead of US PPI data

GBP/USD is extending its winning streak to refresh 2024 highs above 1.2950 in the European session on Friday. The pair regains traction as the US Dollar stays pressured ahead of the US PPI and Consumer Sentiment data. 


Gold backs and fills the spike of the previous day

Gold backs and fills the spike of the previous day

Gold is pulling back after the stellar gains made on Thursday following the surprise fall in the US inflation rate in June. Cooling inflation implies a greater chance that interest rates will fall, making non-interest-bearing Gold more attractive. 

Gold News

Bitcoin volatility surges amid impact of US CPI data

Bitcoin volatility surges amid impact of US CPI data

Bitcoin initially dipped before rallying after the release of US CPI data on Wednesday. Ethereum and Ripple are possibly set to mirror BTC’s pattern, showcasing the synchronized dance of cryptocurrency markets.

Read more

We’re still playing the central bank waiting game

We’re still playing the central bank waiting game

Financial markets started the year expecting six rate cuts from each major central bank. But it didn't take long for more resilient US activity data, coupled with some unwelcome news on American inflation, for investors to begin rapidly scaling back those expectations. 

Read more