Covid-19 effects on global economyMay 14, 2020 2020-05-14 7:10
Covid-19 effects on global economy
Covid-19 effects on global economy
Categorized as a black swan event and analogize to the economic scene of World War Two, the outburst of COVID-19 (the disease engendered by Severe Acute Respiratory Syndrome coronavirus 2 (SARS-COV-2)) has had an inimical effect on global healthcare systems with an undulation effect on every aspect of human life as we know it. The World Health Organization (WHO) declared the COVID-19 outbreak as a global emergency on 30th January 2020. In retaliation to ‘flatten the curve’ , governments have implemented border shutdowns, travel restrictions and quarantine in countries which comprise the world’s largest economies, sparking fears of an imminent economic crisis and recession. In an attempt to understand the turmoil effect on the economy, the detrimental effect of COVID-19 on the world economy, emphasizing on primary sectors which include industries involved in the extraction of raw materials, secondary sectors involved in the production of finished products and tertiary sectors to include all service provision industries are discussed below.
The pliability of the agricultural sector has been tested by the COVID-19 outbreak. A global slackening in demand from hotels and restaurants has seen prices of agricultural commodities sink by 20%. Countries around the world have obstructed a number of protective deeds to contain the exponentially increasing spread. This encompasses social distancing, avoiding unnecessary travel, and a prohibition on congregations. Instruction on self-isolation upon contact with suspected carriers of the virus is likely to impact the number of available inspectors and delivery staff critical to ensuring verification and transportation of products. This will have pronounced implications for perishable goods such as meat and vegetables. Furthermore, markets have gone a step further by shutting down floor trading which has impacted the ability of commodity exchange. The Chicago Mercantile Exchange is a recent example. ‘Panic buying’ is further complicating shortages beyond supermarket shelves. The American Veterinary Medical Association (AVMA) have expressed concern over low levels of animal pharmaceuticals for several large drug suppliers.
Petroleum & Oil
In the course of a meeting at the Organisation of the Petroleum Exporting Countries (OPEC) in Vienna on March 6th, a withholding by Russia to slit oil production triggered Saudi Arabia to retaliate with extraordinary discounts to buyers and a threat to pump more crude. Saudi, considered as the de facto leader of OPEC, heightened its provision of oil by a quarter more than February – taking production volume to an unprecedented level. This generated the steepest one-day price crash seen in nearly 30 years – On March 23rd, Brent Crude dropped by 24% to $34/barrel to stand at $25.70. Although a decrease in the number of COVID-related deaths has caused some stabilisation of oil prices, there is still much uncertainty.
On the background of a viral outbreak already diminishing the demand for oil, this oil-price war is predicted to have grave implications for the global economy. In more ordinary times, cheap oil may have functioned as an advantage for economies. However, savings on petrol are implausible to be deflected into more spending as populations are instructed to practise social distancing and the working class are uncertain about job security. Furthermore, any expansion to consumer activity is likely to be exceeded by damage caused to populations reliant on revenue from other forms of energy such as Shale gas.
A survey conducted by the British Plastics Federation (BPF) demonstrated how COVID-19 is influencing manufacturing businesses in the United Kingdom (UK). Over 80% of respondents anticipated a reduction in turnover over the next 2 quarters, with 98% admitting consternation about the negative impact of the pandemic on business operations. Importation issues and staffing deficiencies stood out as the primary concerns for businesses due to upheaval to supply chains and self-isolation policies. Indeed, for many important positions within a manufacturing company, ‘working from home’ is not a feasible option. As the UK is embracing similar protective strategies to the rest of the world, and due to the global overlap of supply chains, we can anticipate these anxieties to transcend borders. The Chemical Industry is anticipated to reduce its global production by 1.2% — the worst growth for the sector since the 2008 financial crash. Major chemical manufacturing companies such as BASF who were in the operation of upscaling production in China have had to hinder their activities, contributing to a slowdown in predicted growth.
COVID-19 has also overblown all levels of the education system from pre-school to tertiary education. Different countries have had different strategies ranging from complete closure in Germany and Italy to targeted closure in the United Kingdom for all but workers in key industries with over 100 countries imposing nationwide closures of education facilities. UNESCO approximates that close to 900 million learners have been affected by the closure of educational institutions.
Global impact of COVID-19 on school closures. Figure produced by UNESCO
The influence of long-term school closure is yet to be seen however a study showed that a one week closure of schools in Taiwan during the 2009 H1N1 outbreak found that 27% of families could not go to work as a direct result, 18% lost income with $6433 of wages lost in a sample size of one single school in addition to a profound impact on school staff. A study by the Brookings Institution modelling closures in major US cities and nationwide insinuated that there would be a median cost of $142 per student per week. This then imparts to an estimate that a four-week closure of New York City would lead to an economic impact of $1.1 billion and that a nationwide closure for 12 weeks would cost 1% of GDP.
Source: Rabobank, Macrobond
COVID-19 has profoundly impacted communities, businesses and organisations globally, erroneously affecting the financial markets and the global economy. Blundering governmental responses and lockdowns have guided a disruption in the supply and demand chain. Initially, in China, lockdown restrictions meant a drastic reduction in product supply by Chinese factories, while quarantine and self-isolation policies reduced consumption, demand and utilisation of products and services. As COVID-19 has advanced to hit the rest of the world, China will begin to recuperate faster than the rest of the countries, reinforcing its trade negotiating power against the US. In fact, Chinese companies will be in an advantageous position to obtain their western counterparts, which are greatly dependent and will be inevitably affected by the stock market. In addition to the disturbance in the supply chain, the capital market sector has also been affected. In the US, the S&P 500, the stock market index which estimates the stock performance of 500 large companies on the US stock exchange, the Dow Jones Industrial Average and the Nasdaq fell drastically until the US government secured the Coronavirus Aid, Relief, and Economic Security (CARES) Act, with the indexes rising by 7.3% (31), 7.73% (32) and 7.33% respectively.
The COVID-19 pandemic has generated an unrivalled challenge for healthcare systems worldwide. In particular, the risk to healthcare workers is one of the greatest vulnerabilities of healthcare systems worldwide. Contemplating most healthcare workers are not being able to work remotely, approaches including the early disposal of viral testing for asymptomatic and/or frontline healthcare staff is imperative. Increasing healthcare costs, scarcity of protective equipment including N95 face masks, and low medical capacity, ICU beds and ventilators have ultimately unveiled weaknesses in the delivery of patient care. In the US, there is disquietude regarding uninsured individuals, who may work in jobs inclined to an increased risk of viral infection which may lead to significant financial reverberations in the event of illness.
Significant changes to the dynamics of healthcare are likely to ensue, leading to enormous investment into disease prevention infrastructure, and the expedited digital transformation of healthcare delivery. In the US, primary pharmaceutical ingredients are imported mainly from India (18%) and the EU (26%), while China accounts for 13%. China is also the largest exporter of medical devices to the US, accounting for 39.3%. Production detain and limitations in supply would inadvertently lead to revenue loss. In the UK, AstraZeneca has stipulated that COVID-19 is likely to influence its 2020 revenue growth.
The hospitality and travel industry have conceivably been most hard-hit, with hourly workers facing inherent devastating hardships. Marriott International with approximately 174,000 employees is assured to place tens of thousands of workers on furlough. Hilton Worldwide has also apprised lenders on 5th March 2020 borrowing a precautionary $1.75 billion under a revolving loan to preserve money and to maintain flexibility “in light of the uncertainty in the global markets”. Hotel industry revenue per available room in the United States fell 11.6% for the week ending 7th March 2020, whilst in China, occupancy rates fell 89% by the end of January 2020. Other United States hotel companies are aiming approximately $150 billion in direct aid for employees due to an unrivalled fall in demand, along with an estimated $1.5 billion loss since mid-February.
With the trepidation of a new financial collapse recession and, times like these urge for resilient and strong leadership in healthcare, business, government and wider society. instantaneous relief measures need to be implemented and adapted for those that may fall through the cracks. Medium- and longer-term forethought is essential for how the economy is rebalanced and re-energised following this crisis. A wide socioeconomic development plan comprising sector by sector plans and an ecosystem that stimulates entrepreneurship so that those with sturdy and sustainable business models can be allowed to flourish. It is sagacious that governments and financial institutions persistently re-assess and reappraise the state of play and ensure that the ‘whatever it takes’ promise is truly delivered.