Coronavirus has dealt a severe blow to the travel and tourism industry – that is why we are heading for a recession

The question is no longer whether it will come and more but how long it will last, writes Hamish McRae

The aviation industry has been hit hard by the coronavirus outbreak (AP)

The Fed has thrown everything at the crisis. Why?

The reason is that the sky has darkened. Whereas a week or 10 days ago it looked as though some countries might escape recession this summer, that is not longer so as the coronavirus outbreak spreads. The questions are how deep the recession will be and how long it will last.

The game-changer is the shutting down of most international travel and tourism. Freight will continue, though it too will take a hit. But the widespread travel bans and the closure of national borders around the world are beyond any of our experience since the Second World War. Travel and tourism together account for more than 10 per cent of GDP. Assume that travel is halved until the autumn, that will directly knock out something like 5 per cent of global GDP through the spring and summer. World growth was running at about 3 per cent a year before the coronavirus hit. So you don’t need to be a whiz at maths to work out that there will be a global recession.

The immediate impact of this will be felt more severely in countries and regions most dependent on tourists. The Alps are shut. Europe’s entire winter sports industry loses a quarter of its season, including the high-earning Easter holidays. Particular industries in the travel area are being savaged. The airlines are an obvious and early victim. The hospitality industry is another, hit not only by the dearth of holiday bookings and the cancelling of conferences, but also by the general collapse of business travel.

The next problem will be the knock-on impact. Airlines and hotels will have to downsize their staff. That is misery for the not-well-enough-paid people who staff them. That in turn has a knock-on impact on their families. But my biggest concern is not the airlines and hotel chains, or indeed the cruise lines, for they will have access to cheap loans to tide them over. The greatest difficulties will be in small hotel and restaurant groups, many of which have to close and will find it hard to scramble though at all. Otherwise sound businesses will fold. The more businesses that fold, the tougher the escape from recession.

So where do we end up? Realistically, this summer will see a recession in overall magnitude that will be broadly similar to that of 2008 and 2009 after the financial crash. We may get off a bit more lightly, for two reasons.

One is that governments around the world are on the case. They have the recent experience of that recession, are aware of the mistakes they made in reacting too slowly, and will not make those mistakes again. You can see that already in the fiscal boost that all major governments are injecting in one way or another to support growth. Central banks will also make ample liquidity available to the markets. Money will be pumped in more or less without limit.

The other is that the financial system is much more robust. There are known weaknesses such as the capital position of some continental European banks, and there will be some unknown weaknesses that will emerge only as pressure builds. But there is no general systemic catastrophe lurking out there.

The only really big worry I have is with the euro, largely because of the stress that Italy is and will continue to be under. But the balance of probability is that once again the European Central Bank will do “whatever it takes” to preserve it. Christine Lagarde, its president, was much criticised last week for her comment that it was not the ECB’s duty to narrow bond market spreads (by implication between weaker eurozone members and stronger ones). This was contrasted with the absolute commitment to preserve the euro by her predecessor, Mario Draghi. But as before, the ECB has to do everything it can to save the euro.

Assuming, as is surely certain, that the world’s governments pile in a huge fiscal boost and the central banks pile in a huge monetary one, when does the economy recover?

Common sense says the autumn. The first quarter of the year, the one we have nearly finished, is going to be dismal. The next quarter will be worse. Realistically there will not be a recovery until it is clear that travel is back to normal, and that is unlikely to be the case by June. The third quarter will be fascinating. If – and it is a big if – the coronavirus is decisively beaten by July, then there should be a real bounce. There will be a sigh of collective relief, markets will recover and people and companies alike will start spending again. If that is the case, the third quarter will be positive.

But we have to be realistic and be aware that even if there is some growth, everything will not be back to normal. There will be a hangover of debt, personal, corporate and government. There will be recriminations between countries which did not deal cooperatively at a time of crisis. And there is the possibility that the virus might return next winter. It is possible, therefore, that growth will not come through until the final three months of this year. Or there may be a bounce in the third quarter, then a fallback and the recovery not really getting going until 2021.

Eventually, of course, there will be a recovery, and it is a reasonable expectation for that to have come through by the end of this year. However, given the likely scale of the damage, we should be aware that the wounds will take a long time to heal.