Where Will The Global Economy Stand After Coronavirus Pandemic?

15 Jun, 2020 | Blogs

The World Health Organization (WHO) first declared the coronavirus outbreak as a Public Health Emergency of International Concern in January 2020. Out of the 195 countries, COVID-19 has infected 192 of them worldwide. In early-March, the number of cases in Europe began rising, and the most affected countries were Italy and Spain. However, by April 2020, the focal point of infections shifted from Europe to the United States, where the number of cases is increasing. The virus has affected more than 5.2 million people, with hundreds of thousands of fatalities. Over 80 countries have stopped the arrival of packages from the most affected countries, ordered companies and businesses to close temporarily, strictly instructed their populations to practice social distancing and self-quarantine, and shut down schools to an estimated 1.5 billion children.

Unemployment and Decline in GDP:

In early February 2020, China became the first country to impose a ban on tourism and travel, followed by Vietnam and South Korea. Over the course of the time, over 30 million people in the United States filed for unemployment insurance, increasing the possibility of a deep economic recession and a considerable increase in the unemployment rate. Previous data for the first quarter of 2020 indicate that the overall GDP of the U.S. declined by 4.8 percent at an annual rate. The preliminary data suggested that this is the largest quarterly decline in GDP since the global financial crisis of 2008, when the U.S. economy fell by 8.4 percent.

Foreign investors have pulled out more than USD 16 billion out of India and an estimated USD 26 billion out of developing countries in Asia, thereby raising concerns of a major economic recession in Asia. Furthermore, estimations also suggest that COVID-19 could push more than 29 million people in Latin America into poverty, upturning a decade of efforts to decrease income equality. More than 30 million people in European countries, including France, Spain, Italy, Germany, and the U.K., have applied for help in paying wages (State Support Program). Preliminary data from the first quarter of 2020 indicate that the Eurozone economy was affected severely and declined by 3.8 percent at an annual rate.

The economic crisis is forcing governments of different countries to execute financial and fiscal policies to sustain economic activity. Nevertheless, in doing so, these policy approaches are intensifying differences between economies that support nationalism versus those that lookup for a coordinated international response. Additionally, they are displaying policy differences between developed and developing countries in Europe as well as between the southern and northern members of the Eurozone.

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Another Blow to the Global Economy:

International organizations are taking measures to provide monetary and financial aid to economies in need. According to the International Monetary Fund (IMF), the overall government expenditure and revenue standards to uphold economic activity through mid-April stood at USD 3.3 trillion. On the other hand, equity injections, guarantees, and loans amounted to an additional USD 4.5 trillion. Nevertheless, the IMF estimates that the increase in planned burrowing by economies globally will ascend to 9.9 percent of global gross domestic product (GDP) in 2020, up from 3.7 percent in 2019.

Among developed countries, the government fiscal balance to GDP ratio is anticipated to increase to 10.7 percent in 2020, up from 3.0 percent in 2019, while for the United States, the rate is projected to increase from 5.8 percent to 15.7 percent. The ratio for developing economies is projected to rise to 9.1 percent in 2020, up from 4.8 percent in 2019. The IMF further said that countries like the United Kingdom, Germany, Japan, France, and Italy have each announced public sector support measures amounting to over 10 percent of their GDP.

Events Contributing to the Decline in GDP Since the 1900s:

World War I and the Great Depression were the two most significant events in the early 1930s that led to the collapse of a previous era of globalization. The primary reason for this collapse is the fact that over 40 percent of all economies at the time entered default, separating the majority of them from the global capital markets until the later part of the 1950s. Another major explanation for this demise is the resurgence of trade barriers and capital controls. By the time WWII ended, the new Bretton Woods agreement had addressed only a limited set of issues, those most relevant to the traumatic transformations of the Great Depression and WWII. The agreement combined extensive controls of cash flows with domestic financial repression.

Since the 2008 global financial crisis, the new globalization cycle has suffered massive blows, including the U.S.-China trade war, a European debt crisis, and Brexit. Now, the COVID-19 outbreak has brought about the first crisis since the 1930s that has affected both developed and developing countries.  Their recessions may be deep and long. The uncertainties about pre-coronavirus global supply chains, concerns about self-reliance in necessities and resilience, and the safety of international travel are all likely to continue — much after the COVID-19 crisis is stabilized (which, in itself, is going to be a lengthy process). The monetary situation post-pandemic may not be similar to the preglobalization era of Bretton Woods; however, the damage to trade and finance worldwide is probably going to be severe and long-lasting.

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The Pandemic has Worsened the Economy’s Pre-existing Conditions:

The effects of COVID-19 will deepen the four pre-existing conditions of the global economy. The first of them is secular stagnation — an environment where there is little to no growth, combined with a near-deflation and a lack of private investment returns. This will worsen as people will remain hesitant to take risks and save more in the aftermath of the Pandemic, thereby slowing the demand and innovation.

Second, the divide between rich economies and the rest of the world in their pliability to crises will broaden further.

Third, the reliance of the entire world on the U.S. dollar for trade and financing is likely to remain persistent. Even while the possibility of investments involving the U.S. becomes minimal, its attraction will increase compared to the other parts of the world. As a result, this will intensify the ongoing dissatisfaction.

Finally, economic populism will result in governments shutting off their own economies from the whole world. This will never give rise to self-sufficiency, or anything similar to it, but it will undoubtedly strengthen the first two conditions and increase resentment of the third.

Normalization is Almost Impossible:

The first impulse of people as the coronavirus lockdown began was to search for historical analogies, including WWI, WWII, and the Great Depression. Since then, what has appeared ever more to the forefront is the historical novelty of the shock that we are living through.

The economic crisis defies calculation. Several economies now face a profound and far more severe shock than they have ever experienced. In industries such as the retail, already under the extreme pressure from the fierce competition online, the temporary lockdown may seem to be terminal. There are possibilities of several stores not opening, causing the owners to lose their jobs permanently. Millions of employees, small-business owners, and their families are going through the upheaval. What appears is that the longer we try sustaining the lockdown, the deeper will be the financial losses, and slower will be the recovery.

Our idea of economy and finance has been fundamentally disturbed. Since the global financial crisis of 2008, there has been a lot of discussion about the dire need to reckon with extreme skepticism. We now know what drastic change looks like.

Most Jobs Will be Gone and Never Return:

The COVID-19 outbreak is affecting a large number of international economic and trade businesses, ranging from services such as medical supplies, tourism, and hospitality to food and beverages, consumer electronics, transportation, financial markets, energy, and a range of social activities. On the other hand, the economic and health crises could threaten to disproportionately hit economies of developing countries that are hindered by limited financial resources and where healthcare could quickly become burdened.

Several low-wage, labor, and low-skill jobs, particularly those provided by small firms, will be negatively impacted and not return to normalcy. Conversely, workers providing essential services such as healthcare, food and beverages, fire-fighting, logistics, policing, and public transportation will be in higher demand. Additionally, new job opportunities are more likely to be created in the essential services sectors. They will heighten the pressure to increase wages and improve benefits in these low-income sectors.

Future training programs will be inexpensive and digitally delivered, which will be required to provide the necessary skills in new employments. The shift of so many jobs online reminds us that a significant and broad expansion of broadband, Wi-Fi, and other network infrastructure will be necessary to facilitate the digitalization of economic activity.

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