Julio Rivera: The COVID Pandemic and Its Impact on the Global Economy

We’re all aware of the human cost of a pandemic, such as the current novel coronavirus pandemic gripping the world. We don’t need to be reminded of the human toll. However, pandemics like this can have a drastic impact on other parts of life, such as the economy. 

Growing concerns over the coronavirus outbreak have prompted world governments to take action to protect their economies. Lawmakers in the United States approved a $2 trillion stimulus package to help businesses stay afloat while they are forced to close down to prevent the virus from spreading. The Federal Reserve has also promised additional support for financial markets. 

In the U.K, members of parliament pledged they would do “whatever it takes” to keep the economy going. Their efforts include up to £330 billion ($398 billion) in loan guarantees, along with £20 billion in additional financial handouts. The U.K. government also covered up to 80% of worker’s salaries for a time to prevent layoffs and furloughs. 

There are two main aspects of the “coronavirus problem.” First of all, there’s the matter of actually containing it. Governments need to shut down and work together to create health initiatives designed to contain the virus as much as possible. Those measures are sure to cause plenty of damage to the economy, given how expensive they will be. The other aspect is that the outbreak happened at a terrible time for the global economy, which was already weakened by policy uncertainty and trade conflicts. 

An In-Depth Look

How the coronavirus spreads through the U.S, and how the country responds to it can have a significant impact on the economy – both at home and abroad. In 2018, the $21.44 trillion GDP of the United States accounted for 23.6% of the global economy. 

As the country deals with COVID-19, looking at how other disease outbreaks affected the economy could help. One of the first economic consequences of the current pandemic has been a decline in equity markets. Another has been a drastic increase in volatility. These effects could continue over time. Bond yields have also collapsed with the Federal Reserve reducing interest rates to virtually 0%. Something similar happened in the U.K, with the Bank of England reducing interest rates in the U.K to 0.1%. 

Global oil prices have also dropped by as much as 50%, due in part to a supply war between Saudi Arabia and Russia and a general drop in demand as people travel less. 

People initially thought the virus would affect whole sectors, in particular tourism and travel. With governments encouraging, if not mandating, social distancing, people look to avoid large crowds. The result is that businesses are closing, and the economic effects of the virus are becoming more widespread. The tourism industry is going to be a significant casualty of the virus, but it is far from the only economic sector COVID-19 can – and will – cripple. 

Experts are concerned that global GDP could grow by almost zero, rather than the expected 2.5 -3% growth typically seen. 

The Impact on Supply and Shipping

Shipping makes up around 90% of all global trade. Many businesses have switched to a “just-in-time” supply chain following the pandemic. 

One problem is that companies aren’t taking steps to trace the supply chain back to the start. Companies often outsource the production of components and parts to suppliers around the world, unaware that their suppliers may also outsource to other people. 

With ports across the world imposing a 14-day quarantine for vessels coming from or passing through, China – and with China being home to seven of the busiest container shipping ports in the world – supply chains are being disrupted. 

Production of goods slows down because the parts used to make goods in the West come from China, and they aren’t arriving on time. Car companies have had to slow production because they don’t have the parts needed. 

This is likely the first time that the global supply chain has been hit so drastically by a global pandemic. China’s role in the global economy was the cause of this disruption. While the SARS outbreak of 2002 was significant, China accounted for just 7% of global manufacturing at the time. China now accounts for over 25% of global manufacturing. There has also been an increase in the amount of cargo passing through Chinese ports in recent months. 

Some businesses did learn from history and have increased their stock of components and parts from 10-15 days to 15-30 days. Other companies have attempted to create backup supply chains for the most important things they need and have shifted production to their home countries. 

Even though COVID-19 has drastically impacted the shipping industry, there is no cause for concern over the long-term health of the industry. The shipping industry has existed for centuries and is always adept at overcoming obstacles like this. 

Hospitality and Travel To Take Some Damage 

Travel companies such as airlines and cruise directors are feeling the sting of the pandemic. These effects will likely only get worse, the longer the situation lasts. Airlines in the United States have asked for over $50 billion in government aid to minimalize the damage caused by COVID-19. 

The International Air Transport Association (IATA) estimated that the airline industry could lose up to £113 billion this year due to COVID-19. The actual impact could be even worse since many countries have restricted – if not banned – air travel to and from certain countries. Air travel between the United States and the European Union was worth £20.6 billion in 2019. That figure will all but dry up as many EU states tell Americans to stay away. 

The cruise industry hasn’t been helped by all the stories of people stuck on ocean liners in quarantine. Major cruise operators have announced they will halt operations and leave their ships running idle as the world shuts down. Cruise company stocks have dropped by up to 70% since the start of the outbreak. 

One potential impact of coronavirus, once it passes, is how people take vacations. People are likely to holiday at home with staycations and feel that their home country has more to offer than they thought. It’s possible that people could start staying at home more for vacations, which would cause further damage to airlines and cruise companies. 

Other Potential Economic Impacts of Coronavirus 

It’s not all bad news for the economy. There could potentially be positive outcomes from all this. One industry that stands to gain from coronavirus is cargo airlines. With more pressure on shipping, it’s time for airlines to step up. People will be more willing to pay the increased cost of air freight if they have something that must be delivered on time. 

The environment has also benefited somewhat from the crisis. The strict shutdowns have reduced manufacturing and travel, reducing pollution and emissions. Studies have shown the positive environmental impact of everyone staying at home, with some countries – including Italy and China – having such a noticeable drop in pollution it could be seen from space. 

Some investors could find that opportunity awaits in the volatility caused by the virus. The market volatility has made equity investment attractive as a way to rebalance a flagging portfolio. Volatility gives investors the chance to buy and sell at better rates than expected, so long as the timing is right and the investor is agile enough. Now is the time to buy into weaknesses and sell into strengths. 

The Eventual Recovery 

The good news to come from all of this is that hospitality, travel, and other industries affected by the pandemic can recover in time. Many restaurants and fast-food places are starting to open back up slowly. Meetings will be rescheduled, trips will be postponed, but the world will recover in time. 

Of course, the recovery will start from a low point, and it may take time for businesses to recover back to where they were at the start of 2020. Even so, it is possible. More jobs will open up again, people will start spending their money again, and the economy will slowly but surely return from the apparent brink of death.