This article is written by Yashovardhan Agarwal, currently pursuing B.A. L.L.B.(Hons.) from Hidayatullah National Law University. This article answers the most awaited question which is the impact of the pandemic on the global economy. The major areas which were affected by this pandemic are discussed herein.
Table of Contents
The World Health Organisation (WHO) first announced a public health emergency considering the outbreak of COVID-19 in January 2020. Since the first detection of the virus in Wuhan, a Chinese Province, it has been traced in over 190+ nations including all the U.S. territories. Around the beginning of March, the focal point of the infection moved from China to Europe, Italy in particular, but by April 2020 the epicentre shifted to the United States, where the number of patients has increased.
More than 3.2 million people have been infected with the virus with around one-third in the United States, with thousands of deaths. More than 80 countries have closed their doors to countries with diseases, ordered businesses to close, advised their populations to self-quarantine and closed schools to an estimated 1.5 billion children.
By the end of January 2020, China became the first country to implement travel limits, followed by South Korea and Vietnam. In the five-week period from mid-March to late-April 2020, more than 30 million Americans have applied for unemployment benefits, thereby increasing the possibility of a prolonged global slump and a major rise in unemployment levels. Preliminary evidence for the first quarter of 2020 reveals that the U.S. GDP plummeted by 4.8% annually, the highest quarterly fall in GDP since the fourth quarter of 2008 after the global financial crisis when the US economy collapsed by 8.4%.
Global funds have attracted an unprecedented $26 billion from the developed countries, especially from the Asian countries with more than $16 billion out of India, which is the prime reason for growing worries over Asia’s biggest economic slowdown. Some figures also display that 29 million people in Latin America could plunge into poverty, undermining a decade of attempts to reduce income inequality.
In Europe, more than 30 million citizens in Germany, France, the United Kingdom, Spain, and Italy have applied for state assistance for their incomes while figures from the first quarter of 2020 indicate that the Eurozone economy declined by 3.8% annually, the highest quarterly downturn since the series began in 1995.
The pandemic crisis is a challenge for Governments to pursue monetary and fiscal policies that support credit markets and sustain economic activity. However, in doing so, these strategies reveal gaps between countries that support globalization and those that favour a concerted international response. Political gaps between developed and emerging economies and between northern and southern Eurozone countries are also increasing in Europe.
After a slow reaction, central banks are engaging in a sequence of simultaneous financial market interventions, and national governments are implementing monetary policy measures to boost their economies. International organizations are also taking steps to offer grants and other financial aids to countries in need. Such and other acts have been called “unprecedented,” a phrase that has also been used to describe the pandemic and policy responses.
The International Monetary Fund (IMF) projected that investment and tax policies to maintain economic growth, implemented by mid-April 2020, amounted to $3.3 trillion and that loans, equity contributions, and subsidies amounted to a further $4.5 trillion. As a result, the IMF forecasts that the growth in borrowing by governments worldwide will grow from 3.7% of global gross domestic product (GDP) in 2019 to 9.9% in 2020.
Originally, the assumption was that the COVID-19 pandemic shall only be concentrated in China. Later, however, it expanded across the world through human migration.The economic hardship was extreme because people were told to sit at home and the impact was felt in different areas of the economy, with travel bans affecting the airline industry, athletic event cancelations affecting the athletics industry and other industries as well.
There are parallels between the COVID-19 crisis and the events of 2007-2008 as many people assumed in the early recession in 2020 that the impacts would be largely localized (in that case based on the assumption that the subprime mortgage crisis would be a relatively minor problem affecting only the US, but ultimately affecting the global financial system).
The unexpected economic instability triggered by COVID-19 is not only disruptive but has spillover consequences because it has triggered demand and supply disruptions in virtually every area of human activity. Some industries which have been affected by the outbreak of this disease are as follows:
Travel and Tourism Industry
The Coronavirus epidemic has prompted the Governments of several countries to place bans on non-essential travel to countries impacted by COVID-19, temporarily halting tourist permits, work visas and immigrant visas. Some countries have placed a full travel ban on all types of outward or inward transport, outside travel, shutting down all the airports in the region. At the height of the coronavirus pandemic, most flights were empty due to mass passenger cancellations.
Subsequently, the travel bans imposed by Governments lead to a decrease in the market for all modes of transport, which caused some airlines to briefly terminate operations such as Air Baltic, Polish Airlines, La Compagnie and Scandinavian Airlines.
These travel restrictions alone cost the tourism industry a loss of over $200 billion worldwide, despite other sales losses for tourist flights. According to IATA (International Air Transport Association), a gross loss of $113 billion has been estimated to harm the aviation industry. US airlines have been pursuing a $50 billion rescue fund for the US airline industry alone. The GBTA (Global Business Travel Association) estimated that the business travel industry will lose $820 billion in sales from the coronavirus pandemic.
Private sector banks had the greatest risk exposure to credit during the epidemic. Non-performing loans resulted from providing loans to small and medium-sized enterprises (SMEs), airlines, hotels, tour operators, restaurants, retailers, construction and real estate companies. After the pandemic, there has been a general decrease in the number of financial transfers, a reduction in debt payments, and a decrease in the use of ATM machines worldwide. This led to fewer fees being collected by the banks that adversely impacted their earnings.
Fintech firms have also been affected. Few FinTech businesses have seen very poor market interest, leading to a lack of sales and earnings, which adversely impacted the equity interests in venture capitalists that funded existing and new Fintech firms. As a result, several venture investors started to buy new investments, which contributed to the drying up of funding for some FinTech firms. On the other hand, the lockdown caused by the coronavirus outbreak resulted in higher demand for certain types of online services, such as online shopping.
The schooling and learning system, including instruction and evaluation methodologies, was the first to be hit by such closures. Only a couple of private schools may use electronic education approaches. On the other hand, the low-income private and Government schools have been shut down entirely for not getting access to e-learning solutions. In addition to lost learning opportunities, students no longer have access to nutritious food during this period and are exposed to economic and social tension. Like for example In Indian Government Schools the majority of children studying here come under the poverty line hence to motivate them and their parents to make them attend the school, the Govt. started a mid day meal initiative in which these children were provided with free lunch. Now, because of this outbreak these children are deprived of this benefit.
The pandemic has also significantly disrupted the higher education sector, a key determinant of a country’s economic future. Many Indian students are registering in universities abroad in the United States, the United Kingdom, Australia and China, particularly in those countries which suffer most from the pandemic. Many such students have now been prohibited from entering these countries. If the situation continues, the market for foreign higher education is expected to decrease in the long run.
The greatest problem for all, though, is the impact of the epidemic on the job rate. Recent graduates in India fear the withdrawal of job offers from the companies due to the current situation. The Indian Economic Monitoring Center reports that unemployment increased from 8.4% in mid-March to 23% in early April, and urban unemployment to 30.9% in mid-March.
Needless to mention, the pandemic has turned the centuries-old, chalk-talk teaching paradigm into a technology-driven one. This revolution in the provision of education is forcing politicians to work out how to accelerate participation on a scale while providing equitable e-learning strategies and solving the digital divide.
A multi-pronged approach is needed to address the crisis and develop a stable Indian education system in the long term.
Health care sector
The healthcare sector is at the epicenter of this unprecedented global pandemic challenge, and the private sector has taken the opportunity to provide the government with all the support it needs, be it testing support, preparing insulation beds for treatment of positive patients, or deploying equipment and staff to identified nodal hospitals.
While the private healthcare sector is fully prepared for any eventuality, it is also a fact that, unlike other sectors, the sector faces a twin burden: (a) Investing additional manpower, equipment, consumables and other resources to ensure 100% preparedness for hospital safety and eventual treatment of patients, if necessary. (b) Experience a sharp drop in OP footfall, elective surgery and international patients.
The industry has witnessed a loss of business and this trend is expected to continue in the foreseeable future (at least 3-6 months) and the fact that the costs of the sector are mainly fixed (about 80 per cent) is expected to result in losses and a serious impact on cash flows.
It is likely that this industry will be viewed favorably whenever the government announces any fiscal stimulus. The sector is also likely to benefit from a rise in health consciousness and the greater the policy emphasis that this endemic is likely to contribute to.
The medical device industry has also been affected. The nation imports consumables, disposables and construction equipment from China, including orthopedic implants, gloves, syringes, bandages, computed tomography and magnetic resonance imaging tools. Due to the current crisis in China, it is difficult for medical device manufacturers across India to procure essential raw materials and electronic components from Chinese factories.
While some of the factories in China have resumed service, there is still a shortage of essential electronic parts and raw materials. This adversely affects the profits and productivity of Indian companies importing medical devices and small parts for the manufacture of finished goods. This may also put upward pressure on the prices of medical devices in the short term.
The oil crisis
The spread of Covid-19 presents a significant danger to the global oil and gas industry. The increasingly drastic measures taken to reduce the spread of the virus interfere with many of the sector’s key processes: offshore workers must balance the maintenance of social distances while living and working in confined spaces; travel bans and quarantines inhibit the ability of companies to travel and hold meetings; and the uncertainty caused by the pandemic does nothing to reassure them.
This uncertainty is further compounded by the lack of a clear historical precedent for the oil and gas phenomenon. The International Energy Agency ( IEA) noted that the 2003 SARS pandemic was a loosely similar event, but noted that the centerpiece of both the Covid-19 outbreak and the global oil industry, China’s role, has changed dramatically over the last two decades.
As the Agency states, since 2003, China’s oil demand has more than doubled, and by 2019, China’s growth accounted for more than 80 % of global oil demand growth.
The disruption of Chinese oil has had an impact felt around the world; in February, the IEA reported that demand had dropped by 435,000 barrels per day ( bpd) in the first quarter of this year alone, the first quarterly contraction in demand in more than a decade. The Agency announced the following month that the shutdown of the Chinese economy following the virus caused a global oil demand drop of 1.1 million bpd compared to 2019, and lowered its annual growth estimate by more than a quarter to 825,000 bpd, the lowest growth since 2011.
Rystad Energys research firm has taken a step further, predicting that a 25 per cent fall in oil prices could see oil and gas investment cut by $30 billion globally, cutting the economic lifeline for an industry that has already been looking to long-term decommissioning projects rather than new drilling opportunities. As a result, the pandemic could prove to be an existential threat to the oil and gas industry, as social and economic challenges force the historically conservative sector to adapt to a rapidly changing environment.
While there are some reasons for optimism, in particular the reaction of the industry to the 2014 oil crisis, which offers a basic basis for future crisis management approaches, it remains uncertain if the oil industry is sufficiently prepared to respond to this emergency.
Global Growth Rate
The economic situation remains highly dynamic.Uncertainty about the extent and depth of the health-related economic effects of the recession is driving expectations of risk and uncertainty in financial markets and business decision-making. In fact, concerns surrounding the global pandemic and the feasibility of public initiatives designed to minimize its spread, add to financial uncertainty. The economic situation is exacerbated by a record collapse in the price of crude oil, reflecting the global downturn in economic development, the risk of disinflation, and leading to the deterioration of the global economy across multiple channels.
On April 29, 2020, Chairman of the Federal Reserve, Jay Powell, stated that the Federal Reserve would use its “full range of tools” to support the economic operations as the Commerce Department announced a 4.8% decrease in the U.S. GDP for the first quarter of 2020.
When reviewing the state of the U.S. economy, the Federal Open Market Committee released a statement saying, “The current public health crisis will impact economic growth, jobs, and inflation in the short term and pose major threats to the economic outlook in the longer term.”
The OECD reports that rising direct and indirect economic costs across global supply chains, decreased demand for goods and services, and decreases in tourism and business travel mean that “the negative effects of these trends for other countries (non-OECD) are important.” Foreign trade, calculated by trade volumes, slowed down in the last quarter of 2019 and was projected to decrease further.
Moreover, the OECD argues that China’s rise as a global economic player represents a major break from previous public health episodes. China’s growth, coupled with globalization and the intertwined existence of economies through capital flows, supply chains, and foreign investment, raises the expense of preventing the spread of the virus through quarantines and limitations on labour movement and travel.
The economic consequences of the pandemic are distributed through three trading channels:
(1) directly across production chains as decreased economic output extends from intermediate goods suppliers to finished products suppliers;
(2) as a consequence of a decrease in total economic activity, which decreases the demand for goods in general, including imports; and
(3) by reducing trade with commodity exporters who supply producers which, in effect, reduce their imports and adversely affect the trade and economic activity of exporters.
The globalization phase was still in reverse till last year and now this is happening. International trade has never really recovered from the global financial crisis — from a 10% rise, it has been about $1-2 trillion. Adding to this, the trade tensions and the WTO negotiations are grinding to a halt. Now, with this pandemic, there is another awareness of the insecurity generated by global economic interdependence. As a result, some countries face difficulty in accessing medical equipment, others consider that their factories can not function as supply chains are connected to China.
According to the World Trade Organization (WTO) outlook for April 8, 2020, global trade volumes are expected to fall between (13 to 32) %in 2020 due to the economic effects of COVID-19.
Estimates suggest that all geographic areas will suffer a double-digit decrease in trade rates, with the exception of ‘other zones’ composed of Africa, the Middle East, and the Commonwealth of Independent States. North America and Asia will face the steepest decline in export volumes.
The forecast also predicts that industries with large supply chains, such as automotive goods and telecommunications, shall suffer the sharpest declines. While services are not included in the WTO outlook, this sector of the economy is facing the greatest disruption as a result of travel and trade constraints and the closure of retail and hospitality facilities.
The rapidly changing complexity of the COVID-19 crisis poses a variety of problems that make it impossible to quantify the entire expense of global economic development. Such problems are, but are not limited to:
- How long is the situation going to last?
- How many jobs will be involved on a temporary and permanent basis?
- How many nations will be contaminated and how much economic activity will be reduced?
- When are the economic impacts going to peak?
- How much economic production will be disrupted as a result of the viral outbreak?
- What are the most appropriate monetary and fiscal strategies at the national and global level to resolve the crisis?
- What temporary and permanent effects will the crisis have on workforce organisation by the businesses?
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