With the spread of COVID-19, economists fear an imposing global recession. But the question is, is such fear justifiable? In this article, we’ll take a look at the economic impacts of this rising pandemic.
The COVID-19 first emerged in December 2019 in Wuhan, China. To date, it has killed more than 3,200 people with more than 92,000 people infected in more than 10 countries and territories. The number of infected people is especially worse in China, which also happens to be a major manufacturing hub.
Several factories across China has shut down over the past couple of months. Factory workers are reportedly refusing to leave their homes and come to work for fear of infection. Meanwhile, employers are now offering double the wages just to get people in and get jobs done.
Amazon, the world’s largest retailer, is now concerned that they might not have enough inventory to fulfill the projected demands for the upcoming Prime Day in July. The retailer giant even warned its third-party merchants to prepare for “supply chain disruptions due to recent global events originating in China”.
Similarly, fashion czars Amancio Ortega and Bernard Arnault are also feeling the ill-effects of COVID-19. Both have lost billions following a disruption in retail chains for fast fashion and luxury brands. More than one-third of all clothing and textiles are made and imported from China.
Multi-billionaire Elon Musk lost $8.9 billion after shutting down its newly opened factory in China for two weeks. Musk earlier planned for an aggressive growth in the region but has since been derailed because of the virus.
Investors are panicking. Ten billionaires have lost a collective approximate of $83.4 billion while others have lost hundreds of millions. A massive sell-off of stocks around the globe has become noticeable. Shanghai Composite and Euro Stoxx 50 have fallen by 5.2% and 12.4% respectively. In the US, Dow Jones dropped by 3500 points or approximately 12.4%, the biggest one week sell-off since the financial crisis of 2008.
The drawdown in the global financial market begs the question: “is a worldwide recession a near possibility?” Financial analysts say it’s possible by simply looking at the valuation of safe assets and how they have spiked sharply, along with how the term premium on long dated US bonds are falling to near record lows to negative 116 basis points. Valuation of safe assets refer to the dollar amount investors are willing to pay for the safe harbor of US government debt.
Lasting Economic Effects of the COVID-19 Pandemic
According to a study conducted by students from the Harvard University, there are three lasting effects of the COVID-19 pandemic: indirect and direct hit to confidence, and supply disruption.
Otherwise called the “wealth effect”, indirect hit to confidence can have a massive effect in advanced economies where household exposure to the equity asset class is high. This means that as markets fall, household wealth contracts. When that happens, household saving rates move up resulting in the decline in consumption.
Meanwhile, a direct hit to consumer confidence means that buyers become too scared to venture outside. They become weary of discretionary spending and are probably pessimistic about the future.
Lastly, supply disruption happens when COVID-19 causes the shutting down of production and thereby disabling the critical components of supply chains. Without these critical components, production could halt and layoffs could occur. There would be a huge gap across economies and industries if supply disruption is prolonged.
Key Takeaways from the COVID-19 Pandemic
There are three key takeaways, or lessons, from this pandemic.
First, there is a need to adopt new technologies and business models to possibly minimize the effects of pandemics across countries. For example, the SARS outbreak in 2013 gave birth to online shopping thus accelerating the rise of Alibaba. In this case, the highly contagious COVID-19 strengthens the need for e-learning or the e-delivery of education. Similarly, it strengthens the campaign for the use of smartphone trackers as a powerful public health tool.
Second, COVID-19 could possibly decentralize global value chains. This means that the global value chains model could become more fragmented so as not to rely heavily on one producer economy. For small businesses, this pandemic is a wake-up call for the need to diversify supply chains. There must also be contingency plans in case suppliers are unavailable, inventory runs low or if employees on the ground are unable to work.
Third, there could be political ramifications as the virus puts into test the different political systems’ ability to effectively protect their constituents. The exposure of brittle institutions could happen, giving way to political shifts. It might even shape the US presidential elections, depending on the duration and severity of this pandemic!