Search

The Economic Implications of the Coronavirus


We already know that the global phenomenon of the coronavirus has already had significant impacts on daily life, and healthcare. It will likely continue to do so in the future – you don’t face a global pandemic without also significantly impacting the mindset of the global populous. A cultural shift following the coronavirus is guaranteed at this point. What hangs in the balance is a struggling world economy. While the global quarantine may be temporary, what won’t be as temporary would be the economic effects of the coronavirus. The world is about to change – consumer habits are going to shift, supply chain diversification will be more common, among many other changes. Whether they will be beneficial changes are yet to be seen.


The Local Level: Unemployment and Small Businesses Failure

The shutdown of non-essential business across many countries around the world has caused an almost simultaneous worldwide economic crash, not seen since the Great Depression. While the government shutdown of public life may have been important to protect public health, the side effects of the decision to close down countries are starting to become apparent. Unemployment rates have skyrocketed, and numerous industries have plummeted. In America alone, they are about to reach 26.4 million unemployment claims – 15% of the American workforce. That is just the number who have been able to claim unemployment benefits, implying that the actual unemployment number is very likely much higher. This is a similar case all around the world. Many countries have adopted government programs to give citizens relief in these times (ex. US issuing cheques, and Canada reducing employment insurance restrictions). With that said, no matter what, a government cheque will never be sufficient to replace a salary. For the average lower middle class or underprivileged person, the longer the coronavirus quarantine goes on, the less of a chance they will have food on the plate for the next day. This may not be immediately apparent in first-world countries, but countries like India, where a vast amount of people are in poverty already, this will become a massive issue. If this economic crisis turns into anything like the 2008 Great Recession, then there will be massive social ramifications post-coronavirus quarantine. Based on CDC statistics on previous economic disasters, there was nearly a 4% increase in opioid deaths per 1% increase in unemployment. We will not immediately see the social impacts of the coronavirus. However, within the next few years, it is very likely that social impacts, such as “deaths of despair” from substances, are likely to emerge. There is a notion in society that the economy is this ungraspable, esoteric concept that does not concern the regular person. If nothing else, the coronavirus pandemic has taught us that the health of the economy has a direct impact on the health of the regular person. We would do well to take this lesson into the future.


Currently, rising unemployment rates are caused in large part by the impact of the failing small businesses. Small businesses have long been considered the backbone of a national economy. The large majority of employment and GDP growth are caused by new start-up small businesses. They contribute finances to the local economy and provide specialized services that big business often cannot. So, when governments around the world shut down non-essential businesses, there goes the vast majority of small businesses. Small businesses are, by name, small. They do not get a massive amount of revenue. What they depend on is a steady stream of customers. The coronavirus shutdown has put numerous small businesses on the ropes. Customers can no longer go to small businesses; small businesses no longer have the steady inflow of cash to keep running. And let’s be honest, no amount of government compensation cheques can replace a steady inflow of revenue. Already, many small businesses have laid off their employees to deal with the ongoing economic crisis. It is very likely that even after the quarantine, employees will be furloughed, in hopes of trying to revitalise previous revenue intake prior to the coronavirus shutdown. While the unemployment rate is ballooning right now, in large part due to small businesses being shut down, even after the economic crisis is finished, high unemployment will remain for a long time. Not all businesses will come back out of this alive.


The Crisis on the National Level

Let’s look at this crisis on a more macro scale. The stock market crash has been noticeable all around the world. While this is detrimental for many investors, in my view, analyzing the stock market is more useful in an alternative way. The stock market, very simply, tries to anticipate the future and what the future will be worth in terms of business. So, in other words, analyzing the stock market means that ordinary folks get an insight into what economic experts believe will happen in the future, to the global economy. The fact that the stock market has plummeted means that there is a ton of uncertainty in the minds of economists. The fact that faith and certainty in the global economy are so low in the view of many investors, means that the economic outlook in the future is not great.


A lot of the economic uncertainty is not just from looking at businesses going under because of the coronavirus economic crisis. Moreover, it is because of the government’s reaction to the coronavirus. Governments have been splurging money as if money grows on trees, to alleviate the coronavirus situation. The US government by themselves has managed to add almost 6 trillion dollars to their national debt in just the past handful of weeks. Honestly, governments weren’t given a choice. Citizens are suffering, and the government has a responsibility to help their citizens in this crisis. But everything has consequences. Countries at this point are simply running on deficits, and deficits do not really magically vanish. What this means is that countries are now stuck with a massive amount of debt. National debt does not magically disappear. Consequently, there will either be a dramatic hike on taxation, or inflation.


There are three real possibilities in the future resulting from the coronavirus. Two of them are government instigated, and the other one sort of is not:


1. High Taxation: To try and recover the national debt, the government could decide to hike taxes, which could spell trouble for an already economically struggling citizen base.


2. Inflation: Inflation is the sustained increase in the prices of goods in a country. As is, the inflation risk is growing by the minute. This is for two reasons:


a. Firstly, governments could attempt to print out excessive amounts of money in this crisis to pay off debts, lowering the perceived value of the current. To compensate, businesses may raise prices to keep their revenue stream going and lay off even more people.


b. There is a chance that after the coronavirus quarantine ends, citizens will want to buy goods faster than products are available, what with global supply chains being down. Therefore, businesses may raise the price of goods, because demand is simply higher than supply.


3. Deflation: The opposite of point 2.b. is also entirely possible, leading to deflation. Because people could be scared of the coronavirus economic crisis, it could make them save more and spend less. Because of this, demand would be lower than supply, leading to deflation, and raising the value of cash. This is actually an issue, as a ton of people are accruing debt because of the coronavirus. Raising the value of currency too high would also raise the value of debt. As a result, people would have an even more difficult time paying off debt. And unfortunately, this seems like a plausible scenario. The global Consumer Confidence Index (CCI) is plummeting, meaning that consumers are less likely to buy goods in years, lending credibility to this theory.


Customer Confidence Index (CCI) Graphed 2014-2020 (Data: OECD)



Damaged Industries

Well, none of those above scenarios sounds remotely good. To add on to that train of bad news, well, here’s more. Post-coronavirus, the travel and aviation industry will be decimated. Travel is almost non-existent right now, and citizens will likely be a lot more cautious about travelling than before the coronavirus situation. This might seem like a minor problem in the face of the coronavirus, but we have to remember two things: (1) for some countries and states, tourism is their main source of revenue, (2) airline industries are massive contributors to a national GDP, directly, and indirectly, by powering the tourism industry. The fact that this industry is basically non-existent right now, and will be heavily damaged going forward, is a bad omen. To try and alleviate this problem, governments have, for example, tried to bail out numerous airline industries. The problem with this is that since governments are bailing out companies ad hoc, governments effectively become major equity holders in private companies. If we care at all about the national debt and not increasing it, then the government needs to get out of the entanglement they are in with the private sector as soon as this economic crisis is over.


To make matters worse, Saudi Arabia decided to wage an oil price war with Russia at the same time as the coronavirus economic crisis. Because Saudi Arabia decided to flood the market with oil, global oil prices are down massively. In fact, in America, prices per barrel of oil are reaching negative. This means that companies will literally be paying investors to take their oil, instead of selling it. This might sound like a good thing, that oil prices are so low. But, because they are so low, oil companies are running deficits right now. For many countries, the oil industry is what fuels their national economy. But now that the price of oil is so low, countries like America are down yet another crucial industry to lift them out of this economic crisis.



The World Looking Forward


The fact of the matter is the coronavirus economic crisis will have enormous ramifications on the global economic view of China. This is the second major virus to come out of China in the last two decades, after the 2003 SARS outbreak. Regular Chinese people should not be vilified for this. But, the fact of the matter is, investing in China is starting to look riskier than its worth. Right now, much of the world’s supply chains go through China. Many countries will likely move their supply chains out of China into countries that can provide the same services, albeit at a higher cost, but with less risk. The good news for China is that not all multinational companies will move out of China. Some companies may look at other firms fleeing China as an opportunity to undercut their business rivals, by staying in China and taking the risk to continue to use low-cost labour. Sadly, there are not going to be too many major companies that will likely do this.

Countries will likely start to take a more hardline economic stance against China. For years, China has been undercutting its economic integrity by means such as stealing intellectual property (where do you think your off-brand Nikes come from?). Countries have turned a blind eye to it, in favour of gaining access to China’s factories. But after China initially mishandled the coronavirus and let it spread worldwide, causing an economic disaster, countries will likely lose faith in China. This is not to mention any future economic sanctions that countries might place against China. President Trump has already hinted as such.


In terms of global economic policy, the orthodox move has been to globalize, globalize, globalize. Companies, for years, have valued efficiency over resilience. After a global economic shock like this crisis, companies will likely start to deglobalize. They have seen the effect that having multinational supply chains can backfire when a global pandemic hit. After all, companies do not want to paint the image that they are international when they want to profit, and domestic when they fail and incur debt. Deglobalization will likely be a more popular policy, for better or for worse.

For a general economic outlook, global growth could drop to 1.5 per cent in 2020, half the rate projected before the virus outbreak by the OECD. Recovery will be much more gradual through 2021, assuming that there is not a second wave of this virus. Many countries may go through a recession if the situation does not ameliorate.


Light at the End of the Tunnel?


While many companies have been hit hard, some companies will likely come out of this pandemic in relatively decent shape. Companies that specialize in online selling will not suffer as much. This is because, as physical stores are closed right now, online marketplaces like Amazon aren’t. The point is, consumer habits will likely shift further in favour of buying online more often. Companies like Amazon and other general online companies will benefit heavily, as shown in the chart on the right.


Overall, this article has been painting a bleak picture of the world. While it is true that the global economy is in very rough shape right now, it certainly is not impossible to get out of. Right now, it is a time for economists around the world to emphasize minimizing risk. Playing the economic game is balancing risk versus reward. Economists, investors, and business owners will all have to realize that this is a tough situation and that they will likely make mistakes coming out of this economic crisis. What they will have to do well is learn from mistakes and learn from failure. Speculation plays a major role in the economy. The stock market is proof of that. It is possible that we will come out of this current economic problem in better shape than anyone expected. We can hope that re-opening the economy will spur a massive economic bounce back. But right now, there is a much higher chance that things will turn out badly. Amidst these uncertainties, as citizens, we must put our faith in economists and policymakers, as they try to navigate through this unprecedented economic crisis.


Sources

https://www.bbc.com/news/business-51706225

https://www.oecd-ilibrary.org/docserver/7969896b-en.pdf

https://data.oecd.org/leadind/consumer-confidence-index-cci.htm#indicator-chart

https://www.mohamedel-erian.com/commentary/articles/

https://www.mckinsey.com/business-functions/risk/our-insights/covid-19-implications-for-business

https://upfina.com/24-6-unemployment-rate-coming/

https://www.weforum.org/agenda/2020/04/covid-19-pandemic-disrupts-global-value-chains/

https://www.nber.org/aginghealth/2017no3/w23192.shtml

https://foreignpolicy.com/2020/04/15/how-the-economy-will-look-after-the-coronavirus-pandemic/

48 views
  • Instagram
  • discord
  • spotify