With more than 400,000 confirmed cases of COVID-19, businesses are coping with lost revenue and disrupted supply chains as factory shutdowns and quarantine measures spread across the globe, restricting movement and business activity. This pandemic is sending ripples around the world. As the world grapples with the coronavirus, the economic impact is mounting – with the G20 Finance Ministers and Central Bank Governors having a conference call on 23 March to discuss how to address the emergency.
The International Monetary Fund’s Managing Director Kristalina Georgieva issued a statement following the call, in which she outlined the outlook for global growth: “For 2020 it is negative – a recession at least as bad as during the global financial crisis or worse.” But she added: “We expect recovery in 2021. To get there, it is paramount to prioritize containment and strengthen health systems – everywhere.”
The Organisation for Economic Co-operation and Development warned on 23 March that the shock from the virus is already bigger than the global financial crisis. OECD secretary general Angel Gurria said many countries would fall into recession and countries would be dealing with the economic fallout of the COVID-19 pandemic for years to come. “Even if you don’t get a worldwide recession, you’re going to get either no growth or negative growth in many of the economies of the world, including some of the larger ones, and therefore you’re going to get not only low growth this year, but also it’s going to take longer to pick up in the in the future”, he stated. This statement comes after the United Nations Conference on Trade and Development, the UN trade agency, warned of a slowdown of global growth to under 2% this year, effectively wiping $1 trillion off the value of the world economy.
Economic slump is wildly predicted for China. China is the world’s second-largest economy and leading trading nation, so economic fallout from this former COVID-19 epicentre will be critical to watch. Economists polled by Reuters on March 3-5 said the outbreak likely halved China’s economic growth in the current quarter compared with the previous three months.
The poll of more than 40 economists, based both in and outside mainland China, forecast growth to fall to a median of 3.5% this quarter from 6.0% in the fourth quarter of 2019, a full percentage point lower than predicted in a February 14 poll. “If you’re in a city which has been basically closed down or put under virtual house arrest, you’re not going to go out to the streets, you can’t go to the cinema, the restaurants…with all those sorts of things, economic activity will be substantially negatively affected,” said Rob Carnell, head of Asia-Pacific research at ING.
According to Rob Carnell, the Chinese economy is likely to be hit further by reduced global demand for its products due to the effect of the outbreak on economies around the world. Data released on 16 March showed China’s factory production plunged at the sharpest pace in three decades in the first two months of the year, something which could mean an even greater economic slowdown than predicted in that poll. “Judging by the data, the shock to China’s economic activity from the coronavirus epidemic is greater than the (2008) global financial crisis. These data suggest a small contraction in the first-quarter economy is a high probability event. Government policies would need to be focused on preventing large-scale bankruptcies and unemployment” said Zhang Yi, Chief economist at Zhonghai Shengrong Capital Management.
In a frantic bid to address the impact, United States Senate passes historic $2 trillion rescue package. So far, more than 3 million Americans filed unemployment claims last week. UK to pay up to 80% of employee wages for those unable to work due to the pandemic. The European Central Bank to launch €750 billion stimulus program, following US Federal Reserve move to cut interest rates to nearly zero. The coronavirus and the efforts underway to control its effects are literally bringing much of the world to a standstill. That standstill entails tremendous risks. What the coronavirus has not done, however, is to put in train a process of deglobalization. This has already happened earlier, in the reaction to the 2008 global financial crisis and what came in its wake.
The pandemic of COVID-19 is the third great shock of this still relatively new century. But COVID-19, the contagion which is so widespread largely because of human hyper-interconnectivity on a regional and global scale, is dramatically accelerating this process. Borders, on land, at sea and in the air, are staging a comeback, sometimes unilaterally, even in the EU. The COVID-19 crisis has become the third great shock of the century, after the 9/11 attacks in 2001 and the process unleashed by the fall of Lehman Brothers in September 2008, which triggered economic and financial contagion.
To combat the economic fallout, the United States Federal Reserve on 15 March cut its key interest rate to near zero. But the move, coordinated with central banks in Japan, Australia and New Zealand in a joint-effort not seen since the 2008 financial crisis, failed to shore up global investor sentiment, with oil prices dipping below $30 a barrel on 16 March, and a 9% slump in share values when Wall Street opened.
China is the world’s biggest oil importer. With coronavirus hitting manufacturing and travel, the International Energy Agency (IEA) predicted the first drop in global oil demand in a decade. On 9 March, oil prices lost as much as a third of their value – the biggest daily rout since the 1991 Gulf War, as Saudi Arabia and Russia signaled they would hike output in a market already awash with crude, after their three-year supply pact collapsed. Anyone hoping cryptocurrencies might prove a safe haven was disappointed. Bitcoin lost more than 30% of its value in the five days to 12 March, Reuters reported, outpacing losses for stocks and oil. Meanwhile, the European Central Bank (ECB) also took action, launching on 18 March a €750 billion Pandemic Emergency Purchase Programme that is expected to last until the end of this year.
On 20 March, the UK announced radical fiscal spending measures to counter the economic impact of a worsening crisis. The government said it would pay up to 80% of the wages of employees across the country unable to work, as most businesses shut their doors to help fight the spread of coronavirus. Earlier in the month, the Danish government announced it would help private companies struggling to manage the fallout from the pandemic by covering 75% of employees’ salaries, if firms agreed not to cut staff.
Meanwhile, the United States Senate on 25 March approved an unprecedented $2 trillion stimulus plan, including direct payouts to millions of Americans. The House of Representatives is expected to pass the rescue package on Friday. The bipartisan deal was announced as the Labor Department released statistics showing more than 3 million people last week filed for unemployment benefits in the US – the most ever in a week.
On 5 March – before the United States travel ban was announced – the International Air Transport Association (IATA) predictied the COVID-19 outbreak could cost airlines $113 billion in lost revenue as fewer people take flights. “The industry remains very fragile,” Brian Pearce, the IATA’s chief economist, told the Associated Press. “There are lots of airlines that have got relatively narrow profit margins and lots of debt and this could send some into a very difficult situation.”
On March 16, British Airways said it would cut flying capacity by at least 75% in April and May. Other UK airlines, including Virgin Atlantic and easyJet also announced drastic cuts. The travel and tourism industries were hit early on by economic disruption from the outbreak. Besides the impact on airlines, the UN’s International Civil Aviation Organization (ICAO) forecast that Japan could lose $1.29 billion of tourism revenue in the first quarter due to the drop in Chinese travellers, while Thailand could lose $1.15 billion.
To be continued ……