Effects of Covid-19 on Global Economy

 

Effects of Covid-19 on Global Economy

Athar Mansoor

Since the outbreak of Covid-19 in the Chinese city of Wuhan in December 2019, the deadly disease has spread to more than 215 countries and territories across the world. By the end of the second week of April 2020, around 1.9 million people had been infected and more than 119,000 died due to the killer disease caused by Coronavirus (SARS-CoV-2). On 11 March 2020, WHO officially declared Covid-19 as a pandemic – the highest level of a health emergency.

Estimates so far predict that the ailment could cut down the global economic growth by 0.5% to 1.5% but the full impact of it may not be known until the effects peak. The adverse effects of the pandemic are vividly evident in a wide range of social and economic activities such as tourism, food, global value chains, financial markets and medical supplies, just to mention a few. The exponential spread of the disease in various parts of the world and without a clear understanding of when the effects may peak, it becomes extremely complex and challenging to accurately predict its economic impact. All forecasts must, therefore, be considered preliminary.

The effects of the virus have not peaked yet and so the Organisation for Economic Cooperation and Development (OECD) has estimated that the global economy may grow only by 1.5% in 2020. This reduction from an initially predicted 2.9% growth rate will have large-scale adverse impact on the entire world population. On 23 March 2020, the OECD Secretary General, Angel Gurria, stated, “The pandemic has set in motion a major economic crisis that will burden our societies for years to come.” The historic drop in yield to below 1% of the US Treasury’s 10-year security on 3 March 2020 is a clear indication of how the investors are moving out of stocks. By late March, investors were rapidly moving out of corporate and municipal bonds which are traditionally considered safe-haven investments, as firms and other financial institutions attempted to increase their cash holdings.

Between February and March 2020, the Dow Jones Industrial Average lost about one-third of its value. The drop in equity prices has raised concerns that foreign investors might attempt to exploit the volatile situation by increasing their purchases of firms in sectors important to national security. The president of the European Commission, Ursula von der Leyen, has recently urged all EU member states to carefully screen foreign investments to minimize the opportunities of exploitation especially in areas such as medical research and critical infrastructure. Covid-19 is also badly affecting global politics as world leaders are cancelling international meetings and some nations reportedly are coming up with conspiracy theories that shift blame to other countries.

The economic situation at present is highly fluid. A highly uncertain situation is fuelling perceptions of risk and volatility in financial markets and corporate decision-making. In addition, uncertainties concerning the global pandemic and the effectiveness of public policies intended to curtail its spread are increasing the market volatility. Before the outbreak of Covid-19, the global economy was struggling due to negative impact of growing trade protectionism, trade disputes between major trading nations, falling commodity and energy prices, and economic uncertainties in Europe such as Brexit. In this environment, Covid-19 could have a much bigger than anticipated impact. While the true economic effects will eventually become clearer, the response to the pandemic could have enduring impact on the way businesses organize their employees, global supply chains, and how states respond to a global health crisis.

The global economy is being affected by the pandemic through three trade channels: (1) directly through supply chains as diminishing economic activity is spread from intermediate goods producers to finished goods producers; (2) as a result of a drop overall in economic activity, which has decreased the demand for goods, including imports; and (3) through reduced trade with commodity exporters that supply producers, which, in turn, reduces their imports and negatively affects trade and economic activity of exporters.

The drop in economic activity, in China, has had international repercussions as firms in several parts of the world have experienced delays in supplies of intermediate and finished goods through supply chains. Concerns are mounting that the virus-related supply shock is creating more prolonged and wide-ranging demand shocks as reduced activity by consumers and businesses is leading to lower economic growth. In this environment, firms are holding cash, which affects market liquidity. As a policy response, central banks of different countries have lowered interest rates and expanded lending facilities to provide liquidity to financial markets and to firms to reduce the chances of insolvency.

If we compare the current situation with the financial crisis of 2008-09, we observe that so far households have not experienced the same kind of loss in wealth they saw during that period when the value of their primary accommodations dropped sharply. Losses in the value of several equity markets in the United States, Asia and Europe, however, could negatively affect household wealth. Heavy job losses could also result in defaults on mortgage payments, which could have a very bad impact on the market for mortgage-backed securities and on the availability of funds for mortgages.

On March 3, 2020, G-7 finance ministers and central bankers released a statement indicating they will use all appropriate policy tools for sustaining the economic growth. The finance ministers pledged fiscal support to ensure health systems can sustain efforts to fight the disease. Most central banks have lowered interest rates since then and taken measures to increase liquidity in their financial systems including lowering capital buffers and reserve requirements, creating temporary lending facilities for banks and businesses, and easing loan terms. Governments of various countries have also adopted fiscal measures to keep their economies buoyant. These measures include making payments directly to households, temporarily deferring tax payments, extending unemployment insurance, and increasing guarantees and loans to businesses.

For a region-wise economic impact of Covid-19, it has been estimated that among the countries highly dependent on trade, e.g. Germany, Canada,  Mexico, Italy, Japan and South Korea, would be most negatively affected by the slowdown in economic activity associated with the virus.

Covid-19 could also trigger a wave of defaults around the world. In the third quarter of 2019, just before the outbreak of Covid-19, the global debt levels had reached record high of nearly $253 trillion—about 320% of global GDP. About 70% of the global debt is held by rich countries and about 30% is held by emerging markets. Globally, most of the debt is held by non-financial corporations (29%), governments (27%) and financial corporations (24%), followed by households (19%). Debt in emerging markets has nearly doubled since 2010, primarily driven by borrowing from state-owned enterprises. Households are facing a big increase in unemployment, and in many developing countries, there is a huge decline in remittances. All of this will leave the households and corporations with fewer resources and they may default on their debts. Having said this, it can be concluded that the quickly evolving nature of the Covid-19 crisis has created several issues that make it challenging to estimate the full cost to global economic activity. However, the world is surely going to go into a deep recession and a wide range of negative social and economic effects for all of us.

 

Athar Mansoor is a civil servant presently pursuing a doctorate in technology and innovation policy. He can be reached at:

atharmansoor74@gmail.com