The Corona Pandemic and Global Economy

The Corona Pandemic has infected over 110,000 people in at least 110 countries globally, according to the World Health Organization. This virus emerged in a Chinese city, Wuhan last December. Since then it has spread like wildfire across borders. Many are labelling it the worst crisis humanity has seen since WWII. A particularly disturbing cause of concern has been the impact of this pandemic on the global economy. It is expected to be worse than the Great Financial Crisis of 2008, as it is hitting households, businesses, financial institutions, and markets all at the same time. See FMCG market and Pakistani economy.

The world’s economy could grow at “its slowest rate since 2009 this year due to the coronavirus outbreak”, according to the Organisation for Economic Cooperation and Development (OECD). It has forecast a growth of just 2.4% in 2020. In fact, a “longer lasting and more intensive” outbreak could halve growth to 1.5% in 2020 as factories suspend their activity and workers stay at home to try to contain the virus.

China is the world’s second largest economy. Last year, imports to China came in at $2.1 trillion. It is the biggest producer of manufactured goods. It has the world’s largest population at 1.42 billion. The virus emerged in China and spread over 80,000 people, killing 3,318 deaths. China managed to contain the outbreak by enforcing strict curfews and lock downs. Factories were completely shut down. The number of cars on the road drastically dropped. The economy came to a screeching halt. Unsurprisingly, this was a huge trade off between the economy and the virus’s containment.

One reason why this is expected to have devastating consequences on the global economy is simple; China is central to it. The shutting of factories in China means that supplies across the world to various industries are halted. Most major industries import parts from China e.g. Apple and Microsoft. China is also the world’s biggest importer of crude oil. Manufacturing has slowed down, and transport remains unutilised. Oil prices have reached an 18-year low. This results in oil exporting countries suffering a massive economic blow. China’s own GDP has fallen by 13.5% in the first three months of 2020. Sale of Chinese cars had dropped by 86% in February.

With the spread of the virus across borders, many countries are reacting differently from China. While most countries have enforced strict travel bans, others have not. Globally, the travel industry is at an all time low. Flights are cheaper than ever. A wild state of panic is gripping the population as people are beginning to stockpile food and other basic necessities. In the meantime, governments are faced with an ultimatum. Should they risk the economy like China and stop economic activity, or let things run their course as is? Countries like India and Pakistan with huge populations of informally employed workers without benefits and sky-high poverty rates are wary of strict lock downs. For them, a lock down does not mean consequences in the future but poor people starving today and now. Lacking the resources and logistics to provide rations and relief packages, they are hesitantly enforcing social isolation. In contrast, Sweden has employed a different approach. “Sweden has gone mostly for voluntary measures because that’s how we’re used to working,” the Public Health Agency’s lead Epidemiologist added. “And we have a long tradition that it works rather well.”

Globally, interest rates are being slashed to increase spending and increase investment. However, investment rates are falling even in the historically safe areas such as gold. It appears that investors are afraid of a global recession. People are staying at home. Owing simply to this, the services industry is declining steeply. This industry employees a huge number of people who also face unemployment in such dire circumstances.

The world is reacting to this crisis by increasing benefits. Chinese policymakers have sought relief for vulnerable households and new firms by waiving social security fees, utility bills and channelling credit. They are subsidizing local industries. In the US, the Senate passed a $2 trillion coronavirus aid bill to help workers and businesses. In the face of record high unemployment, US has also increased its benefits to a record high. The impact of this in long term worries people like Governor Lee Ju-Yeol in South Korea. If the changes in monetary policy like increasing benefits and making allowances for bad debtors does not improve growth, matters will only grow worse. This is likely because factors beyond monetary policy continue to worsen the hinder economic growth, i.e. quarantine, close of factories and decline in demand of services.

To conclude, while it is difficult to predict the spread of the virus and hence it’s impacts, the economy is definitely not looking up. Economists across the globe are expecting a global recession worse than any seen before. China may be currently pumping money into its businesses to keep them afloat, but the decline of demand globally will affect the growth of China’s economy. This will be a dangerous pit fall, should China fall into it.