Economic Impact of COVID-19

Coronavirus (CoV) is a large family of viruses that causes illness. It ranges from the common cold to more severe diseases like Middle East Respiratory Syndrome (MERS-CoV) and Severe Acute Respiratory Syndrome (SARS-CoV). This is a new strain of virus which was unidentified earlier.

The coronavirus outbreak, which originated in China, has infected more than 1.7Mn people (and still counting). Its spread has left businesses around the world struggling with performance issues and increased losses.

Impact on global economy:

Impact of coronavirus is having an extremely significant impact on the world economy and has sent economists in a tizzy and looking for ways to respond. Experience of various countries have shown that the correct policies can make a difference in fighting and mitigating its impact, but come with significant economic tradeoffs. In wake of all the preventive measures to contain the virus and gaining ground on this war front, it comes at the price of slowing economic activity. The evidence is mounting that March marked the start of a deep global recession. The breadth of the collapse is beginning to appear in the initial trickle of economic data across the world, revealing a cratering of trade, reined-in business investment, cowering consumers and surging unemployment that’s sparing few industries.

1.      The coronavirus shock is more severe even compared to the Great Financial Crisis in 2007-08

2.      Stock markets are tumbling and investments in pensions or individual savings accounts are suffering as well. NYSE, Dow Jones, Nikkei, BSE, LSE have all recorded significant falls

3.      Central banks in many countries are lowering the interest rates in order to make borrowing cheaper and to boost economy.

4.      Global markets recovered some ground after US Senate passed a $2Trillion coronavirus aid bill to help workers and businesses. However, it is yet to be seen whether this would be enough to hold the falling economy

5.      Many countries across the world have implemented lockdowns. This has brought the major production chains to a grinding halt.

6.      Gold is generally considered a safe bet and a safe haven in times of uncertainty. However, even the price of gold has also tumbled briefly in March due to widespread fears of a global recession.

7.      Oil has slumped to prices not seen since June 2001. Investors fear that the global spread of virus will further have an impact on oil prices. Oil prices had already been affected by a row between Opec, the group of oil producers, and Russia. Coronavirus has driven it down further.

8.      The pandemic will make a paradigm shift in the whole healthcare industry. The mode of delivery in healthcare will change significantly. Telemedicine will gain more prominence. In such environment where physical consultation model will not be possible for other viral or other ailments, the solution will be tele and video consultation. The understanding that all ailments does not require a physical check is getting further understood and people are getting more educated about it.

Coronavirus has exposed our globally inefficient, expensive, market based system for developing, researching and manufacturing medicines and vaccines. Coronavirus is just one of the several such outbreaks that the last few decades have seen but the logic of our current system, which is a combination of government incentives coupled with private sector development has resulted in a 18 month gap between now and the availability of vaccine. This has exposed that the Private sector does not plan for future public emergency till the time their profitability is assured.

Key statistics-

U.S. jobless claims surging to 3.3 million for the week ended March 21, more than four times the 1982 record;

·          China's January-February fixed-asset investment falling 45% year on year, industrial production slipping by 14%, and retail sales dropping 21%--declines not seen since the reform era began in the late 1970s;

·          Capital outflows from emerging markets far outpacing any previous global crisis episode; and

·          The benchmark S&P 500 index tumbling 30% in a record 22 trading days, such levels not seen since the Global Financial Crisis (GFC).

U.S.

The record economic expansion plan of US has been abruptly paused. Second quarter is expected to continue going weak and recovery will come in the later quarters and 2021. Leading agencies suggest that 2020 will have a contraction of 1.3%, including a 12% decline in the second quarter, from the first. Growth will likely rebound to 3.2% in 2021, implying a loss of GDP of $360 billion relative to our December 2019 baseline

Europe

It is expected that the Eurozone GDP will register a negative growth of 2% for 2020 (as per S&P) and it will take at least an year to rebound (2021 GDP expected to grow at 3%). The decline in growth represents a loss in output this year of €420 billion for the euro zone and U.K. together relative to our previous quarterly forecast. We estimate that lockdowns across the continent will reduce household spending by 40%.

China

China was the earliest in the curve when it comes to Coronavirus pandemic. They already withstood the impact in 2019 Q4 and 2020 Q1. Very different to the whole world, their economy is already showing signs of recovery. They are expected to grow in 2020 by 3% and shoot significantly in 2021 by at least 8.5%. However since China is a key exporter to the world, the world trade dynamics will adversely impact their export business--

Emerging markets

Emerging markets (EMs) are facing three simultaneous shocks relating to COVID-19: supply chain disruption and restricted people flows, falling demand for commodities, and capital outflows.

Impact on India:

COVID-19 cases in India has cross as on today 7500 (and still counting) with a mortality rate of 3.2%. More than 200 countries and territories are reported with novel coronavirus pandemic. Nationwide lockdown announced to contain the coronavirus outbreak has impacted industries and their operations have come to a standstill.

(a)   The Associated Chambers of Commerce of India (ASSOCHAM) states that a minimum stimulus of USD 200 billion is required to support the Indian economy in this time of crisis. A corpus of $50-100 billion cash needs to be infused over the next three months to arrest the loss of jobs and compensate for the loss of income.

(b)  The industry body also said that the government should consider a reduction in GST across the board by 50 per cent for at least three months and 25 per cent for the fiscal.

(c)   Out of the above stimulus, $50-100 Billion will need to infused in this quarter to ensure liquidity and flows

(d)  “We are now looking at 4.3 per cent GDP growth for January-March and dropping to maybe 3.9/sub-4 per cent for April-June. The situation is very fluid, these forecasts will keep on changing depending on the sectoral data that we get,” said Aditi Nayar, Principal Economist, Icra Ltd.

(e)  Exports bucked the six-month declining spree by registering modest 2.91 per cent growth in February 2020 at $27.65 billion, even as there were fears of the coronavirus effect on outbound shipments. All the major foreign exchange earners such as petroleum products, engineering goods, and electronic items registered expansion in the month year-on-year.

(f)    Consequently, trade deficit fell to the lowest level of $9.85 billion in the month. This would augur well for the current account deficit, which already fell to just 0.2 per cent of GDP in the third quarter of the current fiscal year from 0.9 per cent in the second quarter.

Recovery mechanism

Despite the current economic downturn, it is expected that the recovery will happen. The recovery could be strong but the speed and the magnitude cannot be accurately forecasted. It will also depend on the labour market and SME market structure. Europe Asia and US will have to be evaluated separately as the recovery pattern may be different. Once lockdowns and social distancing norms are relaxed, the companies with an existing workforce might be able to resume immediately. However, if companies had decided to opt for significant cost cutting and lay-offs during the COVID scenario, re-hiring and re-building may take time. Hence, the organizations should be taking a balanced decision during the current unprecedented times and not just go on a firing spree.

Recovery pattern is not just a by-product of the fiscal support medium. Transferring to workers and firms may be very effective during the lockdown scenario but may not gain ground during the post Corona scenario and will not be able to stand ground during the sluggish re-employment scenario.

Second important aspect to understand is the quantum lost during the COVID scenario. In order to gain lost ground post COVID, it will rely mainly on three factors (a) Labour stock (b) Capital Stock (c) Productivity.

Key references- S&P Global report, Economic times, KPMG