How COVID-19 will Affect the World Economy?

How COVID 19 will affect the world economy

Topic We Cover: How COVID 19 will affect the world economy

What will be the impact of COVID-19 or Coronavirus on the economy

1. What sectors and economies are most vulnerable?
2. What’s the relationship between the energy sector and the economy?
3. How does the slowdown of economy impact financial markets?
4. How have governments responded to protect from the economic fallout from the epidemic?

  • How much will global poverty rise because of COVID-19?
  • Chart by Bloomberg/BBC

5. Three possible scenarios to impact present economy
6. Labor productivity shock
7. Total factor productivity shock
8. A U.S. recession takes hold as fallout from the coronavirus spreads
9. The Tracking of spread and economic impact of the coronavirus
10. Impact of Coronavirus on the Indian Economy

11. How does Coronavirus spread?
12. COVID-19 Map: List of sectors in India affected by Coronavirus

With over 921,223 confirmed cases of COVID-19 with 46,160 deaths till 1st Apr’20, businesses are contending with lost revenue and disrupted supply chains as factory shutdowns and quarantine measures spread across the globe, confining movement and business activity. In the current scenario only one thing comes in mind actually ‘How COVID-19 will affect the World Economy’.

According to the Alicia Barcena, the Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), the effect of COVID-19 pandemic will assuredly be more devastating than the global economic crisis felt during 2008-2009. It will go down in history as one of the worst the world has endured.

This virus will not only affect human health but also impact an already weakened global economy both from the supply and demand side, whether through the interruption of production chains – which will critically hurt global trade – or through the loss of income and profitability due to higher unemployment and greater difficulties to pay debt service obligations.

As per the study, the number of poor rising from 185 million to 220 million people, out of 620 million inhabitants in total; and the number of people living in extreme poverty could increase from 67.4 million to 90 million.

According to the study that the Coronavirus will affect the region through five channels.

The first channel of transmission of this crisis is the effect that the Decline in Economic Activity in several of the region’s main trading partners will have on countries’ exports of goods. China, for example, is an important destination for exports from several Latin American economies, and it is the top trading partner of Chile, Peru and Brazil. ECLAC estimates that the value of the region’s exports to that destination could drop by as much as 10.7%.

A second channel comes from lower demand for tourism services, which would most sharply affect Caribbean countries. It is calculated that if a travel ban prompted by the virus were to last for one, two, or three months, tourism activity in the Caribbean, for example, would contract by 8%, 17% or 25%, respectively, in 2020.

A third transmission channel would involve the interruption of global value chains. This would mainly affect Mexico and Brazil, countries that import parts and intermediate goods from China for their manufacturing sectors (particularly in the case of auto parts, household appliances, electronic products and pharmaceuticals).

A fourth channel that would affect the region of Latin America and the Caribbean is the drop in commodities prices, above all for South American countries that export raw materials.

Meanwhile, a fifth transmission channel stems from greater risk aversion on the part of investors and the worsening of global financial conditions.

Governments are also taking economic, fiscal and monetary measures that involve increasing social spending, lowering interest rates, intervening in foreign exchange markets, suspending bank credit fees, providing lines of credit for the payment of company payrolls, freezing the reconnection fee for households that fail to pay their water bills, and actions to avoid depleted stocks of basic goods, among others.

The need of protecting the most vulnerable groups from the crisis, particularly the elderly, lower-income sectors and the poor. The more unequal a country is, the more vulnerable groups will bear the burden of the economic impact of the pandemic and the fewer resources they will have to fight the pandemic. To cope with COVID-19 the global and regional coordination and cooperation will be required.

Now there is an answer of few questions which come in everybody’s mind according to the present situations of the world.

What will be the impact of COVID-19 or Coronavirus on the economy

The range of the loss will depend on how fast the virus is contained, the measures authorities take to contain it, and how much economic support governments are ready to deploy during the contagious epidemic’s instantaneous impact and the aftermath.

Initial indications of COVID-19’s brunt on the Chinese economy are worse than initially forecast. As per the surveys of China’s manufacturing and services sector fall fast to record lows in February, automobile sales sank a record 80 %, and China’s exports fell 17.2 % in January and February. The official data confirmed an extensive slowdown in economic activity foreshadowed in low pollution levels and despondent shipping traffic, among other informal barometers. Estimates of Chinese growth have been sharply revised by Analysts, with many now predicting a drop in 1st quarter GDP, the first contraction since China began reporting quarterly data in 1992. As COVID-19 expansion, China’s economic improvement will be challenged as demand from other countries falls as they contend with the virus.

Although in China the outbreak appears to have decelerated, COVID-19 and its impacts have gone global. Infections are climbing in Iran, Europe, South Korea, the United States, and elsewhere, with authorities implementing to a greater extent restrictive measures to contain the virus.

Europe and Japan are likely already in recession territory given their weak 4th quarter performance and high reliance on trade. While the US entered the critical situation with a tailwind, some analysts are forecasting a shortening in U.S. GDP in the 2nd quarter. Estimates of the worldwide impact vary: early last week, the Organisation for Economic Co-operation and Development (OECD) predicted that COVID-19 will slowdown global GDP growth by one-half a percentage point for 2020 (from 2.9 to 2.4 percent); As per the Bloomberg Economics in a worst-case pandemic scenario, the full-year GDP growth could fall to zero.

What sectors and economies are most vulnerable?

Across the global economy the COVID-19 outbreak has created both demand and supply shocks reverberating. Among dominant economies outside of China, the OECD predicts the largest downward growth revisions in countries intensely related to China, especially Australia, South Korea, and Japan.

Major European economies will experience displacement as the virus escalates and countries adopt restrictive responses that restraint manufacturing activity at regional hubs, including in Northern Italy. As a result of discouraged activity, the United Nations projects that foreign direct investment flows could fall between 5 and 15 % to their lowest levels since the 2008-2009 global financial crisis.

At the sectoral level, as authorities encourage “social distancing” and consumers stay indoors tourism and travel-related industries will be among the hardest hit. The International Air Transport Association warns that COVID-19 could cost global air carriers between $63 billion and $113 billion in revenue in 2020, and the international film market could lose more than $5 billion in lower box office sales.

Similarly, in the last few weeks shares of dominant hotel companies have plummeted, and entertainment giants like Disney expect an important blow to revenues. Sporting Events, Restaurants, and other services will also face significant disruption. Industries less reliant on high social interaction, such as agriculture, will be comparatively less exposed but will still face challenges as demand wavers.

What’s the relationship between the energy sector and the economy?

Economic deceleration generally leads to lower demand of energy, and the fallout from COVID-19 has proved no dissimilar. Often, producers acknowledge to demand failures by cutting supply to buoy prices. Last week, in response to the outbreak members of the Organization of the Petroleum Exporting Countries (OPEC) and a few other dominant oil producers met to talk over with another an extra cut of 1.5 million barrels per day through the end of June.

When the agreement fall apart, Saudi Arabia cut prices and lifted output, apparently to harm Russia for denying to agree to production cuts. Following the Saudi decision, Brent Crude fell over 20% , the sharpest one-day drop since 1991, with analysts predicting further declines ahead. For a coordinated policy response to the epidemic the damage from the Saudi-Russian price war sends an unsettling signal to markets hungry, especially considering Saudi Arabia’s current role as G20 president.

In reaction to the price shock, big oil producers, including U.S. firms, could cut down production  and investment, with heavily indebted firms in particular at risk of consolidations, layoffs, and even bankruptcy. Investors are well knowledgeable that energy companies account for over 11 % of the U.S. high productive (below investment grade) market, with rollovers nearly impossible under current market conditions.

In theory, lower prices of oil should aid oil-importing countries, but discouraged activity due to COVID-19 could limit that advantage. In addition, the explosion in domestic U.S. energy production in current years means the United States is exposed to price downturn in a way not seen in initial economic downturns.

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How does the slowdown of economy impact financial markets?

Alarm of an expansive outbreak and its economic impact escalates to financial markets last month, and most international indications are nearing bear market territory (declining at least 20 % from the 52-week high) as process of investors the inferior corporate earnings that will result from the virus. The S&P 500 fell 7 % to open the March 9 session, triggering a “circuit breaker” that briefly suspended trading for the first time since 1997. Overall, the index is down about 17 percen%t from its record high on February 19.

Middle the equity rout, investors have run away to escape to safe-haven assets such as U.S. Treasury bonds, leading to record low yields. For the U.S. government low production translate into low borrowing costs, but low-interest rates may not advantage private companies or individuals (or even all sovereigns) who may find financial markets to risk-averse to extend credit in light of such ambiguity. As longer the virus circulates, the more economic and company performance will be impacted, raising concerns about debt sustainability, especially for highly indebted countries and companies, absent official support.

How have governments responded to protect from the economic fallout from the epidemic?

Thus far, national govt. have announced to a great extent uncoordinated, country-specific responses to the virus. In China, the focal point of the outbreak, officials announced billions in special-purpose loans to companies facing liquidity constraints as well as financial support to specific sectors such as aviation.

In the US, on March 3 the Federal Reserve cut the rate of policy in an emergency action, and on March 9, in coordination with other U.S. bank regulators, it heartened financial institutions to “meet the financial needs of customers and members affected by the coronavirus,” a move aimed at supporting financial conditions to prevent the development shock from turning into a broader financial crisis. On March 9, the Federal Reserve Bank of New York also declared to avoid a deeper credit crunch expanded overnight repurchase operations by $50 billion.

Bank of England and The European Central Bank are expected to take action when their financial policy committees meet later this month. Countries announcing fiscal measures just this month include South Korea ($9.2 billion, 0.56 % of GDP), Japan ($9.6 billion, or 0.19 % of GDP), and Italy ($4.1 billion, 0.20 % of GDP). To contain negative spillovers from the growth shock the ability of such spending will depend on the virus’s path as well as the effectiveness of other measures

In terms of related action, on March 6, central bank governors and the finance ministers of G20 pledged to take “appropriate” fiscal and monetary measures but made no specific commitments. On a March 3 phone call, finance ministers of G7 reaffirmed their “commitment to use all policy tools” but did not outline specific steps. For their part, the International Monetary Fund and World Bank last week disclosed the availability of $50 billion and $12 billion in financing, respectively, to support low income and emerging market economies’ responses to the virus.

Scientists do not yet have a clear comprehension of the behavior of the virus, rate of transmission, and the full extent of contagion; for the foreseeable future uncertainty will be part of the backdrop. At limiting the economic fallout, coordinated, coherent, and credible policy responses provide the best chance from what is already and sadly a human tragedy.

How much will global poverty rise because of COVID-19?

In a recent blog post, we analyzed how the spread of the disease associated with the novel coronavirus (COVID-19) may bring damage to the global economy, and with it to food security and efforts to reduce poverty. We emphasized that the economic impacts of the present pandemic will be different from previous ones, including SARS, avian influenza, and MERS, which caused direct damage to livestock sectors, leading to food shortages and food price hikes in affected areas. No major food shortages have emerged thus far because of COVID-19.

However, the pandemic is having significant economic impacts. It is rattling global stock markets and economic activity has slowed dramatically in places where many people are ill and movements are restricted to contain further spread of the virus. Signs of a continuing economic slowdown are most visible in China, but due to broader containment measures elsewhere, including restrictions on travel, shutdowns of bars, restaurants, and other gathering places, and additional limits placed on services, the economic impacts are now spilling across countries. Fears for a global economic slowdown are increasing. Economic forecasters project global growth could be cut in half in 2020, to 1.5% from an earlier forecast of 3%. In our previous post, we projected that for anyone percentage point slowdown of the global economy, the number of poor—and with it the number of food-insecure people—would increase by 2%, that is, by 14 million people (and possibly more depending on the nature of the economic disruptions). Here we explain how we reached this estimate.

These impacts are as yet hard to predict, since so much is unknown about COVID-19, including how fast it may spread and how effective containment measures will be. The demographic profile of people affected by COVID-19 suggests the direct economic effects of coronavirus-related morbidity and mortality may be more muted than in pandemics like the Spanish flu of 1918, whose impacts fell most heavily on young people, including many in rural communities. Thus far, older people with poor health have been shown to be by far the most vulnerable to becoming seriously ill with COVID-19. Most people in this group are not in the workforce. Aside from increased healthcare costs and lost productivity, the economic damage is thus likely to be felt mainly through the impacts of the restrictions on people going to work, on travel, and on social interaction.

Chart by Bloomberg/BBC

Three possible scenarios to impact present economy

In the present scenario analysis, we assume containment measures will prove effective in slowing the spread of the virus over the coming months, so that its main economic impact is a major, but brief interruption of global economic activity. A rebound would likely follow, once movements of people, goods and services begin to return to normal. This scenario resembles that underlying OECD’s projected global economic growth slowdown of between 0.5 and 1.5 percentage points in 2020.

The implications of such a slowdown for poverty and food insecurity depend on the assumptions made about the duration of the pandemic and transmission mechanisms. On the duration, as mentioned we assume, perhaps optimistically, that the global spread of the virus may be contained within the next few months, so the global economy need not fall into a deep recession, but slow by one percentage point during 2020. We represent the economic impacts through three possible scenarios:

Labor productivity shock: Major impacts come from workers unable to do their jobs. resulting in an average decline in labor productivity of 1.4% during 2020. (This would be equivalent to a 1.4% drop in labor supply).

Total factor productivity shock: Impacts are felt through a temporary paralysis of domestic economic activity caused by disruptions to distribution channels, inability to provide inputs and services due to quarantines for workers, and so on. We pretend this through an avg. decrease in total factor productivity growth big enough to decrease global GDP by 1%.

Trade shock: Impacts are felt through international trade disruptions leading the cost of doing trade to increase by almost 5% on average and enough to provoke a global economic growth cost of 1%.

A U.S. recession takes hold as fallout from the coronavirus spreads

Look at any empty restaurant or coffee shop (if anyone ventured out and the shop wasn't closed), and it's hard to deny that the toll on the U.S. economy from COVID-19 has been severe.

Compared with our forecasts before the virus, the first half of the year will be weighed down by a combination of: the effects of the spread of the virus; the suspension of Boeing 737 MAX production and exports; and the recent Saudi Arabia-Russia standoff, with its drop in oil prices and knock-on effects on energy investments.

Based on government sources and public data, our economic forecast now assumes that the U.S. coronavirus outbreak peaks in May. The current trajectory of COVID-19 has led us to now project GDP growth will be down by 1% in the first quarter, with healthy growth earlier in the quarter providing some support. We expect a sharp contraction for the second quarter, around -6%.

The Tracking of spread and economic impact of the coronavirus

The daily increase in confirmed cases outside China continues to grow rapidly. There are now six countries with over 10,000 cases – Spain, Iran, Italy, the U.S., Germany, and France - and other countries are on trajectories likely to bring similar case counts soon. 62 countries already have an excess of 100 cases. Europe has now become the epicenter of the outbreak, with the U.S. on course to be similarly affected. If there is some good to be found, it is that the daily new case rate has fallen to near-zero in China, where the virus first took hold.

The social and economic consequences of COVID-19 have consequently become much more severe and we now forecast a global recession this year, with 2020 GDP rising just 1.0%-1.5%.

Impact of Coronavirus on the Indian Economy

Up to an enormous range, it will impact the Indian industry. In imports, the dependence of India on China is huge. Of the top 20 products (at the two-digit of HS Code) that India imports from the globe, for a meaningful share China accounts in most of them.

The total electronic imports of India’s account for 45% of China. Around 1/3rd of machinery and almost 2/5th of organic chemicals that India purchases from the world come from China? For automotive parts and fertilizers China’s share in India’s import is more than 25%. Around 65- 70% of operating ingredients of pharmaceutical and around 90% of certain mobile phones come from China to India.

The impact of the outbreak in the Indian economy may be shown in the following sectors namely plastics, organic chemicals, cotton, fish products, ores, etc.

Therefore, in China due to the current outbreak of coronavirus, the import dependence on China will have a meaningful impact on the Indian industry.

In the eastern part of China most of the Indian companies are located which we also can’t ignore. In China, about 72% of companies in India are located in cities like Shanghai, Beijing, provinces of Guangdong, Jiangsu, and Shandong. In various sectors, these companies work including Industrial manufacturing, manufacturing services, IT and BPO, Logistics, Chemicals, Airlines, and tourism.

By the outbreak of coronavirus in China it has been seen that some sectors of India have been impacted including pharmaceuticals, shipping, electronics, automobiles, textiles, mobiles, etc. Also, with industries and markets a supply chain may affect some disruptions associates. Overall, the impact of coronavirus in the industry is restrain.

According to CLSA report, pharma, chemicals, and electronics businesses may face supply-chain issues and prices will go up by 10 percent. Some commodities like upstream and downstream oil companies, metals, could bystander the impact of lower world demand impacting commodity prices.

As per the CII, in FY 2021, GDP could decrease below 5% if policy action is not taken urgently. It is said that the govt. should take some strong fiscal stimulus to the extent of 1% of GDP to the poor, which would help them financially and also manage consumer demand.

In the 3rd quarter (October-December) progress is restricted down to 4.7% and the impact of COVID-19 will further be seen in the 4th quarter.

FICCI survey a marked impact of COVID-19 on business operations showed 53% of Indian businesses have indicated. And 42% of the respondents said that up to three months could take for normalcy to return.

Let’s have a look at the sector-wise impact on Indian industry

Chemical Industry: In China some chemical plants have been close down. So there will be limits on shipments/logistics. It was found that 20% of the production has been impacted due to the disruption in raw material supply. China is a major supplier of Indigo that is needed for denim. In India business is probably to get affected so people acquiring their supplies. However, it is an opportunity. US and EU will try and diversify their markets. Some of the business can be diverted to India which can also be taken as an advantage.

How does Coronavirus spread?

Shipping Industry: The business of cargo movement service providers has been impacted by Coronavirus outbreak. As per the sources, by over 75-80% in dry bulk trade per day per vessel has declined.

Auto Industry: On Indian companies its impact will change and rely upon the extent of the business with China. No doubt the China’s business is affected. However, for the Indian industry current levels of the inventory seem to be sufficient. In 2020, if the closedown in China continues then it is expected to result in an 8-10% decrease in Indian auto manufacturing.

Pharmaceuticals Industry: The pharma industry of India depends heavily on import as of bulk drugs despite being one of the top formulations of drug exporters in the world,. Due to the coronavirus outbreak, it will also be impacted.

Textiles Industry: In China there are several garments/textile factories that have adjourned operations that in turn affecting the exports of fabric, yarn and other raw materials from India, due to coronavirus outbreak.

Solar Power Sector: In solar panels/cells and limited stocks Indian developers may face some shortfall of raw materials required from China.

COVID-19 Map: List of sectors in India affected by Coronavirus

Electronics Industry: In the electronic industry the main supplier is China being a final product or raw material required in electronics. The electronic industry of India may face production, supply disruptions, decrease the impact on product prices due to heavy dependence on electronics component supply directly or indirectly and local manufacturing.

IT Industry: Due to coronavirus outbreak, the New Year holidays in China have been lengthened that unfavorably impacted the revenue and progress of Indian IT companies.

Tourism and Aviation: The inflow of tourists from China and from other East Asian regions to India due to the coronavirus outbreak, will lose that will impact the tourism sector and revenue.

So, now you may have come to know about coronavirus. A  COVID-19 outbreak impacted the globe and has been sense across industries. By the WHO, World’s second-largest economy i.e. China became to stop. Its outbreak is announced as a national emergency. In India, the power may sense through supply chain divisions from China and also as regional players, who imports from China.

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