What is the Economic Impact of Coronavirus
An epidemiological threat, such as the new coronavirus, which causes the disease COVID-19, can have disruptive effects on the economy. It can disrupt the global supply of goods, making it harder for U.S. firms to fill orders. It can also waylay workers in affected areas, reducing labour supply on one end and the other slow the demand for U.S. products and services.
International Monetary Fund Managing Director Kristalina Georgieva says the outbreak is the world's "most pressing uncertainty." The economic disruptions caused by the virus and the increased uncertainty are being reflected in lower valuations and increased volatility in the financial markets. While the exact effect of the coronavirus on the U.S. economy is unknown and unknowable, it is clear that it poses tremendous risks.
Policymakers should, therefore, immediately undertake several steps to address any economic fallout from the virus. The burden of meeting this challenge falls squarely on Congress and the Trump administration. To its credit, the Federal Reserve has aggressively cut interest rates. Still, monetary policy will likely have a minimal effect since interest rates are already low and have been so for some time.
To assess the possible impact of the coronavirus on the economy, it is essential not only to focus on the epidemiological profile of the virus but also on the ways that consumers, businesses, and governments may respond to it. COVID-19 will most directly shape economic losses through supply chains, demand, and financial markets, affecting business investment, household consumption, and international trade. And it will do so both in traditional, textbook supply-and-demand ways and through the introduction of potentially significant levels of uncertainty.
Economists have been using the SARS epidemic to put the coronavirus outbreak in context. The 2003 SARS epidemic is estimated to have shaved 0.5 per cent to 1 per cent off of China's growth that year and cost the global economy about $40 billion (or 0.1 per cent of global GDP). The coronavirus epidemic, which like SARS, originated in China, differs in a few key ways. China's economy accounted for roughly 4 per cent of the world's GDP in 2003; it now commands 16.3 per cent. If the coronavirus has a similar effect on China as SARS, the impact on global growth will be worse.
Moreover, China's growth is weaker than it was in 2003—after years of rapid economic development, China's growth stands at 6 per cent, the lowest it's been since 1990. Its confidence had been shaken by the dual effects of general economic deceleration and the U.S.-China trade war escalation. Even before the epidemic, China's Purchasing Managers' Index was already showing signs of contraction. The February reading slowed from 50 to 35.7, a level in line with that of November 2008 during the global financial crisis. The economic fallout from the coronavirus could rattle China's economy further and dampen global growth.
The coronavirus spreads more quickly than SARS, but, so far, seems to have a lower mortality rate. For its part, China responded more rapidly to the coronavirus outbreak than it did with SARS, employing unprecedented confinement measures in areas such as Wuhan. These measures, while prudent, have created short-term economic pain on the supply-and-demand side.
Outside China, the outbreak has also affected global supply chains, as other governments have also taken immediate steps to slow the spread of the virus. The Harvard Business Review predicts that the peak of the impact will occur in mid-March, "forcing thousands of companies to throttle down or temporarily shut assembly and manufacturing plants in the U.S. and Europe." This again will disrupt global supply chains as well as demand for goods and services in the affected economies. These disruptions make it more difficult for companies in the U.S. and elsewhere to bring their products to customers, and these companies will reduce exports from the U.S. to the rest of the world in the coming months.
Furthermore, households, companies, and governments alike are more rooted in debt now than they were when SARS hit. For example, the U.S. nonfinancial corporate debt of large companies is currently around $10 trillion, up from around $4.8 trillion in 2003. Deutsche Bank released an analysis showing the world's significant economies harbouring the highest debt levels of the past 150 years, with World War II as an exception. They all still need to continue repaying that debt, even if jobs, customers, and tax revenues decline in a weakening economy. These fixed costs then will leave less money to spend on other things. Large amounts of debt often exacerbate an economic slowdown, especially if central banks can do little to ease that burden by cutting interest rates.
The world looks different from the last global virus outbreak in 2003. Global growth is already slow, and financial markets already have very low-interest rates, which means that central banks in almost every major country have little ammunition with which to mitigate any potential economic fallout. This puts higher pressure on governments to use the power of their purse to counter the financial result from the coronavirus. While the fallout from the coronavirus will disrupt supply chains and global demand that could also affect the U.S. economy, the current situation also creates a lot of uncertainty over the longer term. Congress and the Trump administration can do a lot to counter the risks associated with the spread of the virus by engaging in fiscal policies (deficit spending) that will provide relief to affected populations and mitigate disruptions to U.S. firms.
As the coronavirus continues its march around the world, governments have turned to proven public health measures, such as social distancing, to disrupt the contagion physically. Yet, doing so has severed the flow of goods and people, stalled economies, and is in the process of delivering a global recession. Economic contagion is now spreading as fast as the disease itself.
This didn't look plausible even a few weeks ago. As the virus began to spread, politicians, policymakers, and markets, informed by the pattern of historical outbreaks, looked on. At the same time, the early (and thus more effective and less costly) window for social distancing closed. Now, much further along the disease trajectory, the economic costs are much higher, and predicting the path has become nearly impossible, as multiple dimensions of the crisis are unprecedented and unknowable.
In this uncharted territory, naming a global recession adds little clarity beyond setting the expectation of negative growth. Pressing questions to include the path of the shock and recovery, whether economies will be able to return to their pre-shock output levels and growth rates, and whether there will be any structural legacy from the coronavirus crisis.
Global shares take a hit
Significant shifts in stock markets, where shares in companies are bought and sold, can affect many investments in pensions or individual savings accounts (ISAs).
The FTSE, Dow Jones Industrial Average and the Nikkei have all seen massive falls since the outbreak began on December 31st.
The Dow and the FTSE recently saw their most significant one-day declines since 1987.
Investors fear the spread of the coronavirus will destroy economic growth, and that government action may not be enough to stop the decline.
In response, central banks in many countries, including the United Kingdom, have slashed interest rates.
That should, in theory, make borrowing cheaper and encourage spending to boost the economy.
Global markets did also recover some ground after the U.S. The Senate passed a $2 trillion (£1.7tn) coronavirus aid bill to help workers and businesses.
But some analysts have warned that they could be volatile until the pandemic is contained.
In the United States, the number of people filing for unemployment hit a record high, signalling an end to a decade of expansion for one of the world's largest economies.
We think the bigger scenario question revolves around the shape of the shock — what we call "shock geometry" — and its structural legacy. What drives the economic impact path of a shock, and where does COVID-19 fit in?
In 2008, Canada avoided a banking crisis: Credit continued to flow, and capital formation was not as significantly disrupted. Avoiding a more profound collapse helped keep labour in place and prevented skill atrophy. GDP dropped but substantially climbed back to its pre-crisis path. This is typical of a classic "V-shape" shock, where output is displaced, but growth eventually rebounds to its old way.
The United States had a markedly different path. Growth dropped precipitously and never rebounded to its pre-crisis way. Note that the growth rate recovered (the slopes are the same), but the gap between the old and new path remains large, representing one-off damage to the economy's supply side, and indefinitely lost output. This was driven by a deep banking crisis that disrupted credit intermediation. As the recession dragged on, it did more damage to the labour supply and productivity. The U.S. in 2008 is a classic "U-shape" — a much more costly version than Canada's V-shape.
Greece is the third example, and by far the worst shape — not only has the country never recovered its prior output path but also its growth rate has declined. The distance between the old and new way is widening, with lost output continuously growing. This means the crisis has left lasting structural damage to the economy's supply side. Capital inputs, labour inputs, and productivity are repeatedly damaged. Greece can be seen as an example of L-shape, by far the most pernicious shape.
Most of the economic disruptions affect the demand side. People can no longer go to work and often lose their jobs and incomes as businesses shutter their operations. Companies are holding off on investments amid the growing uncertainty. And, exports will inevitably falter as other countries are taking similar actions to slow the spread of the virus.
Travel among the hardest hit
Countries and territories around the world have imposed travel restrictions to curb the spread of the coronavirus. The latest restrictions come from the president of the European Commission, who is proposing a 30-day ban on non-essential travel into the bloc.
Check Out This Post About Things To Consider Before Travelling In Current Coronavirus Conditions
On March 11th, the U.S. barred the entry of all foreign nationals who had visited China, Iran and a group of European countries during the previous 14 days. The ban was later extended to foreign nationals leaving the U.K. or Ireland. In China, most new arrivals in Beijing must now undergo a 14-day quarantine period at a designated hotel or other assigned location. In Europe, many countries have imposed a full-suspension on all flights arriving and departing, as borders are closing around the world.
"The collapse in air travel demand brought on by these severe travel restrictions and the reluctance of travellers to fly has the potential to materially reshape global aviation more meaningfully than the events of September 11th," said Jamie Baker, U.S. Airline and Aircraft Leasing Equity Analyst at J.P. Morgan.
North America drives one-fifth of global activity but generates two-thirds of global profits. This implies that airline failures may solely occur elsewhere, thereby paving the way for higher international margins for the North American 'Big Four' (Air Canada, Delta, American and United) as the crisis fades. 2019 already witnessed a record number of airline failures despite a favourable fundamental backdrop.
Airline stock picking and credit selection have grown more complicated, as investors must increasingly discount scenarios previously considered unthinkable such as prohibiting healthy Europeans from entering the U.S., or the partial or complete shutdown of the U.S. airspace. This scenario cannot be ruled out. The travel industry has been severely damaged, with airlines cutting flights and tourists cancelling business trips and holidays.
Governments around the world have introduced travel restrictions to try to contain the virus.
The E.U. banned travellers from outside the bloc for 30 days in an unprecedented move to seal its borders because of the coronavirus crisis.
In the U.S., the Trump administration has banned travellers from European airports from entering the U.S.
Data from the flight tracking service Flight Radar 24 shows that the number of flights globally has taken a huge hit.
U.K. travel industry experts have also expressed concerns about Chinese tourists being kept at home. There were 415,000 visits from China to the U.K. in the 12 months to September 2019, according to VisitBritain. Chinese travellers also spend three times more on an average visit to the U.K. at £1,680 each.
Consumers stockpiling food
Supermarkets and online delivery services have reported massive growth in demand as customers store goods such as toilet paper, rice and orange juice as the pandemic escalates.
Disruptions to global supply chains are one of the most apparent effects of the coronavirus. Looking more closely at global supply chains, there have already been significant disruptions, with the list of manufacturers outside of China forced to decrease production in their plants growing longer every day.
As noted earlier, China has shut down factories in areas affected by the virus as a preventive measure, causing supply chain disruptions and affecting the mobility and near-term employment prospects of migrant workers.
These disruptions could further spread. As the virus has moved outside of China along with the efforts to contain it, it is possible that many workers around the world may not be able or willing to show up at work, further reducing economic activity. The viral outbreak in northern Italy, for instance, has shut down a firm that is the supplier of electronic parts to automakers across the European Union, meaning auto plants in several countries may need to close. This kind of widening of supply chain disruptions to suppliers of intermediate goods outside of China will make it increasingly difficult for U.S. firms to substitute products from other countries for the missing inputs from China.
How much this affects U.S. firms will depend on how tightly they manage their supply chains. Many firms manage the time between needing new supplies from China and putting them into their production with short lead times—often weeks and not months. These companies will feel the effect of factory shutdowns in China relatively quickly. These challenges affect not just traditional industries such as car manufacturing but also increasingly high-tech sectors such as smartphones and computers. As a consequence of these supply chain disruptions, U.S. firms cannot finish their production and thus cannot bring their products to customers. The result is reduced economic activity and growth.
The virus will not only affect supply, but some sectors of the U.S. economy may also experience declines in demand—and significant reductions in revenue—because of the overall effects on the economy. There are two separate effects to consider. First, people will buy less of some goods and services because they are afraid of potential exposure to the virus. For example, they may be less willing to travel or go out to eat. The result is that air travel and hotels could feel a real pinch. Already lessened demand on food and beverage industries seems to be occurring. As Americans feel increasingly uneasy about the spread of the virus in the country, it is foreseeable that they will further cut back on some goods and increase their emergency savings instead.
Second, when firms are forced to close, workers likely will receive less money than they otherwise would have expected and, in some instances, will receive no pay. As a result, these workers will have less to spend, again cutting overall demand. A fall, so that follows a supply shock constitutes a one-two punch that will further contract economic activity, although the size of these effects is largely unknown.
Check Out This Post About Stay Connected With Customers Through The Coronavirus Outbreak
Mass flight cancellations to and from China—which has been designated as a "do not travel" destination in the United States—means almost no one is travelling to China and, more importantly for U.S. firms, Chinese tourists are not going overseas. A consulting firm estimates that the United States will lose 1.6 million visitors from mainland China, with an associated decrease in spending of 10.3 billion dollars. Multinational companies and luxury goods makers who rely on Chinese consumers have already suffered and had to close stores. As such effects increase around the world, U.S. exporters will find it harder to sell their wares around their globe, which will have negative repercussions for U.S. growth and jobs.
Meanwhile, the U.S. anticipates lower imports from China. The last quarter of 2019 saw low imports, exports, and international trade. There is a risk of a sizable negative demand shock if the public overreacts to the coronavirus outbreak.
The effects of lockdowns are visible
To stop the spread of the COVID-19 outbreak, many countries across the world have started implementing strict measures. States and world capital have been put under strict lockdown, bringing a total halt to major industrial production chains.
The European Space Agency has registered an impressive fall in pollution across the European skies.
Joblessness has spiked as businesses such as restaurants and hotels shutter, with weekly unemployment claims setting a record in the U.S. What makes the coronavirus-led recession different from those that came before it is the speed of the disruption. More than ten times as many unemployment claims were filed in the U.S. during the 2008 downturn, but this time it's happening much more quickly.
The underlying cause of the economic slowdown is a global pandemic. The spread, and thus the economic impact of the virus, is highly unpredictable. But it affects people in all countries, states and localities to some degree.
The pandemic also hurts almost all industries, turning the health care challenge into an economic one. People can no longer travel and go out—Supply chain disruptions idle manufacturing plants. Warehouse workers are becoming ill and increasingly worried about getting sick. Health-care workers on the front lines of the virus could become infected and need to self-quarantine.
The health and safety of the population remain the highest policy priority. Congress and the administration need to make sure that sufficient diagnostic, protective and therapeutic equipment is available. Policymakers also need to make sure that economically vulnerable health care workers and health aides, in particular, do not have to choose between work while sick and staying home. They will need paid sick leave as well as paid medical and family leave. This will mean expanding already enacted protections so that the self-employed also receive benefits.