When reports of a new virus started emerging in China in late 2019, it felt like a crisis far away, too remote to even consider that it would impact us here in Europe. Little did we know that barely two months later, over seven million people would be affected worldwide and over 400,000 would be dead as a result of it at the time of writing this. The human toll is magnanimous, but the worst of it may not even be over yet. It seems inevitable that we are spiralling hard and fast into a global recession.
Hundreds of thousands of people have died from complications related to COVID-19, or Coronavirus disease 2019. While the affected countries are reeling under the immediate health crisis, there may be more bad news to come. Whilst it would be too lengthy of an article to detail all the effects SARS-CoV-2, commonly called the Coronavirus has had on our lives, as aspiring Econometricians, we can approach the drastic impacts from an economic viewpoint. To remain within the scope of an Estimator article, this is a selective account of the crisis.
Economic density and the virus have displayed a symbiotic relationship so far. The spread of the virus had all the makings of an economically destructive agent and economies of density dictated the trajectory of the virus. Initially, the rapid boom in cases occurred in the business centres of China, Italy, Iran and South Korea and spread further initially through mostly business travellers. Major economies stagnating with sluggish growth rates and social unrest in economic powerhouses such as Hong Kong exacerbated what is likely to be a prolonged recession from which recovery will be dependent on the astuteness of policymaking.
Amid the COVID-19 crisis, the global economy is facing a triple shock: on the supply side, the demand side, and in market confidence. It is critical for financial institutions to take specific actions in the short and medium term to move ahead. With most countries facing an impending recession, the fate of the global markets spells a bleak future. Many financial institutions and banks have cut forecast rates for GDP growth of economies, as seen below:
One of the earliest indicators of the deep impact of this crisis manifested itself in a dramatic manner - Black Monday 2020. On 9 March 2020, global stock markets suffered the biggest drop since the Great Recession in 2008. Bond yields fell and there was a dramatic fall in oil prices partly spurred by the failure in negotiations between Russia and OPEC, particularly the price war between Russia and Saudi Arabia. Falling global demand was headlined by significantly reduced demand from China, the world’s largest crude oil importer. However, most markets had recovered by the next day, propped up with dubious claims of reassurance by governments to reinstill investor faith. The worst had yet to come. The global economy is projected to contract sharply by 3 percent in 2020, much worse than during the 2008–09 financial crisis. Not since the Great Depression of 1929 has the global economy faced peril of such degree. Large economies like the US were not performing well even before the pandemic started, as growing trade deficits with China were hurting the manufacturing sector. EU growth reports from Autumn 2019 indicated that structural changes in the manufacturing sector diminished growth forecasts for the next few years and slashed inflation rates. A weak performing global economy hit by a debilitating virus concocted the perfect blueprint for a critical strike to the jugular vein of the economy.
As a result, unemployment being at an alltime high is only expected to grow as many industries are teetering on the brink of a total financial collapse. Particularly affected are those in the informal sectors, with more than 1.6 billion people, including migrant workers at the highest risk to lose their jobs. These workers often lack employment security and live in rented units, making them most vulnerable to loss of income and subsequent physical displacement. In the US alone, 36.5 million people have lost their jobs according to the US Labour Department. McKinsey estimates that as many as 60 million Europeans have already lost or could lose their job. This is akin to the entire nation of Italy becoming jobless. Uitvoeringsinstituut Werknemersverzekeringen (UWV), the Dutch Employee Insurance Agency has recorded the steepest rise in unemployment in the Netherlands since 2003. Most of the unemployed worked in sectors of cleaning, temporary employment, retail, culture, accommodation and food services.
The downward turn of the global economy started, unsurprisingly - in China. Closure of major cities led to a downward pressure on economic growth in the rest of the world too with China projected to grow at 4.9% instead of the forecasted 5.7% at the end of last year. Collectively, the global economy will grow by 2.4% instead of 2.9%. What do these figures translate to? Reduced economic activity usually does not span all industries uniformly. Alongside the tourism, hospitality and retail sectors, manufacturing activities have especially suffered, coinciding excruciatingly with the extraordinary increase in demand for medical equipment and supplies.
This increased demand for critical goods has threatened global supply chains. With economies now leaning towards autarky, this means there is increased demand for domestic production of necessities and overall self-sufficiency in resources. This perspective is also echoed by industries which are now looking towards protectionist policies for survival. One such example is European steel producers demanding the EU to cut import quotas to save local producers in an industry where demand has halved and around 40% of the workforce has been made redundant. Whilst from a globalisation perspective this may seem to signal the death of highly integrated universal trade links, it shifts the spotlight to local producers, who have become enormously important over the past few months. Governing bodies are focused on fostering local talent and entrepreneurship, partially because they are far easier to mobilise in times of crisis. Members of smaller local political bodies tend to face similar problems and localisation of the problem breeds homogeneity in social and political solidarity, which enables them to find locally geared solutions more easily. On the other hand, it is also small and medium sized businesses that have fared the worst. Closures imposed due to lockdown meant many were unable to reach their break-even point due to either disruptions in production and transport or decreased demand, or a combination of all. Besides thriving technology and pharmaceutical companies, large corporations such as Amazon have succeeded in this environment by swooping in to fill the vacuum left by failing smaller businesses. Amazon banked 18% more in sales so far this year, increasing their revenue by more than $75 billion. It is one of the only companies that has seen such growth this year. Jeff Bezos has become richer by $6.4 billion on the back of the pandemic and economic asphyxiation of smaller businesses.
There is particular concern about monopolistic practices employed by pharmaceutical companies which has led to accusations of manufactured shortages in medical equipment and drugs for treatment. If you thought the Netherlands’ testing rate was low, it is important to understand the factors behind how tests are produced and distributed. One of the key ingredients in the testing kit is a lysis buffer solution. Roche Pharmaceuticals, one of the largest companies in the Netherlands is currently the one which produces this solution and they have refused to share the recipe with Dutch laboratories. Moreover, they have created a ‘vendor lock-in’, meaning laboratories which use Roche machines to make medicines also have to use Roche materials to do so. As Roche does not have enough testing materials, other laboratories in the country cannot produce testing kits sufficiently. Similar practices have been observed in other countries too.
Whilst few economies of scale have persisted, there is another reason, perhaps a bigger one, due to which we are observing these current trends towards autarky - trust, or rather, mistrust. In addition to the logistical challenges of producing and transporting massive amounts of necessary goods during a pandemic, there seems to be decreased cooperation amongst countries and even between administrative units within countries. This is evident by the different approaches and policies employed by governing bodies with regards to the trade-off between health and the economy which can be seen in the differing severity of lockdowns. Asymmetric lockdown structures create a trade imbalance and increase skepticism between neighbours with regards to how business is done. The Netherlands is seeing declined trade with Belgium, its second largest trading partner. Leaders of bordering Belgian provinces have expressed displeasure and suspicion at the Netherlands’ more liberal quarantine measures. Normally, there would be an optimal allocation of goods in a competitive free market. However, in the extraordinary incidence of a global health crisis, allocation of medical goods is dictated by the country’s ability to pay. There is thus a large disparity in the amount of testing kits and PPE (personal protective equipment) poorer nations are able to afford, which in turn affects their ability to fight the crisis on the medical front. Commodity hegemony during a medical crisis does not bode well for international relations and has soured public opinion about countries that do so.
Our trust is being tested more than ever - trust in the industries, trust in the government, trust in our neighbours. Trust is the beating heart of the economy. In the absence of trust, profits, wages and employment are all down. As some countries have been accused of seizing medical supplies not intended for them, this disturbing ploy marks a grim opposition to the solidarity and cooperation that is needed today. On a national scale, feelings of hostility are often conveyed with trade barriers. Look no further than the trade war between China and the US for a model example. Across the Atlantic, sharply heightened protectionism versus a cooperative strategy in line with the EU theme of trust and solidarity has led to a rift amongst European countries. There is great disagreement over ‘Coronabonds’ - EU debt sharing to finance expenditures in southern bloc countries like Spain and Italy, whose economies are amongst the worst affected, coming off the back of the Eurozone debt crisis. ‘Coronabonds’ are mainly opposed by the Netherlands, Germany and Austria, who do not want to be held liable for the debts of southern European countries and are instead calling for structural reforms. The lack of a unanimous EU mitigation strategy could sink the whole ship.
Zooming out of Europe to the rest of the world, this graph by the International Monetary Fund depicts current real GDP growth in annual percent change:
An interesting observance in this data are the relatively well-performing developing countries. Some of these countries have experienced outbreaks of diseases like Ebola and Malaria and were thus more prone to taking precautionary measures immediately, compared to developed western countries who have not grappled with a pandemic of this degree in a century (since the Spanish Flu of 1918-1919). Tanzania, which is similarly populated as the Netherlands, has had 509 cases and 21 deaths. African countries have been sharing the knowledge accumulated during the Ebola crisis and have been able to update existing technologies such as a mobile app which prevented the spread of Ebola by connecting potentially infected people with health workers and fast tracking ambulance services to move them into quarantine. It is advisable to proceed with caution however, because it could be the case that these countries have not yet reached the peak of the so called curve. It is noteworthy to describe how India and China, the world’s two fastest growing economies are doing. Having elaborated the case of China previously, India has seen a growth rate of around 3.1% so far, better than most of the world but the lowest the country has seen since 2004. The main economic effects of the crisis in India have centred around the case of migrant workers and those below the poverty line, which makes recovery in India highly dependent on government fiscal stimulus, which has been less than adequate. It is thus predicted that recovery in India will be a lengthy process which, combined with the worse performance of China will result in a weaker anchor to uplift average global economic growth.
Ending the lockdowns remains a critical and delicately traversed action - some reports suggest a re-emergence of the virus could decrease economic performance by an additional 3%. This would be catastrophic as we would then likely see more human suffering as a result of the economic impact of the virus than the direct effects of the virus itself. It thus remains to be seen how authorities handle the situation in this critical period of time and how effective their anti-Corona policies will be in the intertwined medical and economic spheres.