Dark clouds loom over the world as it fights an invisible foe and meets with unprecedented challenges in wake of the Corona Virus crisis. The COVID-19 pandemic, which emerged in China, has now spread to over 180 countries and has infected over 1.6 million people across the world. The scale of adverse impact in terms of lives and livelihoods is looked at as one of the gravest challenges witnessed in the annals of history.
For most countries, the pandemic poses a twin challenge: to contain the spread of the virus and cater to a plummeting economy. The ripple effects of this crisis have brought the world economy to its knees. To put things in perspective, economists claim that the shock to the global economy has been more severe and faster than the 2008 global financial crisis, and even the Great Depression. Even though in these cases stock markets collapsed, unemployment rates soared and GDP crashed, the changes took place over a period of time. However, in the current scenario, similar dire macroeconomic and financial circumstances have unfolded in just three weeks. Economists predict that the virus may be as contagious economically as it is medically.
It all started with China alerting the World Health Organization (WHO) on December 31, 2019, of several cases of unusual pneumonia in Wuhan, a city of 11 million people, majority of who worked at the city’s Huanan Animal & Seafood Wholesale Market. The market was shut down on January 01, 2020. By the fourth week of this month, human-to-human transmission was confirmed, leading to the first major lockdown affecting nearly 56 million people in the Hubei province, along with Shanghai, Beijing and Shenzhen. On March 11, 2020, the WHO declared coronavirus outbreak to be a pandemic.
Shutdown in China was initiation of an unprecedented chain reaction, causing a huge setback in economies across the world. China makes up 16% of the global economy, thus a blow to the Chinese economy can quickly spread to rest of the world via backward and forward trade linkages. According to the UN Trade Report, the world economy will go into recession this year with a predicted loss of trillions of dollars of global income. The UNCTAD estimates a $2 trillion shortfall in global income with a $220 billion hit to developing countries. The annual growth rate is predicted to be below 2.5%, which is the recessionary threshold for the world economy.
Supply and demand sides of the economy have both weakened. Lockdown in several countries have led to major supply chain disruption, starting from the point of manufacturing as many facilities across the world remain shut. China, particularly, created secondary supply shocks in many other countries importing a wide array of industrial equipment, electronics, and parts from the oriental economic giant. This has created a phenomenon called ‘supply chain contagion’, caused by supply shock in one industry or nation leading to supply shocks in other countries or industries. This is fast snowballing into loss of work and job cuts across the world. The number of Americans seeking unemployment benefits in the last three weeks has already been in the excess of 15 million. According to the UN Labour Agency, nearly 200 million full-time workers are expected to get directly impacted due to cutbacks in the next three months alone. This is feeding into plummeting purchasing power, and consequently demand globally.
The scale of economic hit can be gauged from the preliminary response packages look like. In the last week of March 2020, Trump administration approved $2 trillion COVID 19 relief package. The World Bank Group is working to strengthen developing nations’ ability to respond to the COVID-19 pandemic and focusing on country level and regional solutions to address the crisis. It is prepared to deploy $160bn over the next 15 months to support measures that will help the economies to contain the pandemic and recover quickly. While Government of India has already offered relief package to the tune of $26 billion, former chief economic adviser in the finance ministry Arvind Subramanian has recommended stimulus requirement of an amount five times more that this to contain the damages.
How deep is the abyss and how far have we fallen? The nature and true extent of these impacts are still indeterminate as the infection continues to spread and death toll continues to rise. As the situation unfolds, the world is nosediving into an abyss of economic crisis.
“Economic data in the near future will be not just bad, but unrecognizable. There is no blueprint for the current shock, and uncertainty about the extent of contagion and the economic consequences is overwhelming.”A Credit Suisse Economist.