By Vaidahi Sharma (high-school junior at Genesis Global School)
Overview of the Crisis
As is common knowledge in today’s times, the COVID-19 is an infectious disease instigated by a novel virus. Since the occurrence of this disease was first diagnosed and the World Health Organisation declared the disease to be a pandemic, it has spread to over 150 countries worldwide and affected more than 1.5 million people. The disease has caused more than 80 countries to close their borders to arrivals from countries with infections, order businesses to close, and instruct their populations to self-quarantine. It has wreaked havoc on even superpowers like the United States of America, China, and Germany.
It has become clear that the epidemic is having undesirable consequences for the global economy. The pandemic is affecting a broad ribbon of international economic and trade activities, from tourism to medical supplies. To name a few, the effects to curtail social interaction to contain the spread of the virus is disrupting the lives of people globally, adding to economic costs and gradually bringing the economy of every nation to a standstill. It is aptly said that this pandemic has brought forth a debate of lives versus livelihoods.
With more than one-third of the global population under some kind of a lockdown, the coronavirus disease poses the biggest threat to the global economy, and could eventually lead to an international slump. The IMF forecasts the global GDP to come down to -3% in FY 2021-22.
What are the factors triggering the dip in economic activity?
The factors mainly triggering the dip in economic activity are, Destruction of demand for travel, tourism, hospitality and other sectors. Break in discretionary spending, Supply chain disruptions, and Pay cuts and temporary job losses which is affecting market sentiments and investor confidence.
Impacts of COVID-19: Opportunities and Challenges
There is widespread conjecture which is manifesting itself into credible belief as the impact of COVID-19 broadens day by day that the economic insinuations of this pandemic will be greater in magnitude than that of 9/11 and the 2008 global financial crisis. The International Labour Organisation estimates that pay cuts due to this crisis can adversely affect up to 200 million workers across nations. The UN Conference on Trade and Development estimates a downward pressure of up to 40 percent on global foreign direct investment flows.
Social distancing measures have brought global economic activity to a gloomy standstill. The virus’ first foothold was China, which is the bedrock of industrial production and the most integral link in global supply chains. Thus, the 13.5% fall in manufacturing output there, as a result of a prolonged lockdown, has intern disturbed manufacturing in various nations. There could be a possibility of productivity decline due to an influx of sick workers. As the virus spread, an increasing number of countries were forced to quarantine their citizens at home and ban international travel, the retail, entertainment and tourism sectors took an immense hit.
The reduction in income and/or job losses plus business closures has resulted into a steep decline in demand and therefore in economic growth.
This series of events is a formula for a long, distinct slowdown. Governments of numerous nations have recognized this and therefore have come out with stimulus packages in order to provide relief to workers and businesses to help prop up exhausted economies. The fiscal stimulus package announced by the Indian government is barely 0.8% of the GDP which is clearly inadequate. In contrast that of Japan is 20% of its GDP and of US is 11% of its GDP (as illustrated by the following figure)
At the sectoral level, tourism and aviation industries will be among the hardest hit as authorities encourage “social distancing” and consumers stay indoors. The International Air Transport Association warns that COVID-19 could cost global air carriers between $63 billion and $113 billion in revenue in 2020, and the international film market could lose over $5 billion in lower box office sales. Similarly, shares of major hotel companies have plummeted in the last few weeks. Industries less reliant on high social interaction, such as agriculture, will be comparatively less vulnerable but will still face challenges as demand wavers.
If the coronavirus cases peaks in the coming weeks and subsequently recedes, and/or a vaccine or feasible method of treatment is discovered, the global economy could be well on the way to a (relatively) quick recovery, leading to the V-shaped recession curve.
However, if this pandemic drags out, as some have predicted, over six months or more, it would be difficult for economies to withstand the high levels of debt, even at insignificant interest rates. A return to pre-Corona growth levels may be long-drawn (A U-shape) or, in the worst case scenario-as represented by the L-shaped graph.
Possible Solutions and Policy Recommendations
Some policy recommendation and solutions which the government of every nation could implement are; firstly, large fiscal stimuli packages which mainly focus on direct income transfers, support to directly affected businesses, tax cuts and loans to MSMEs and Cut in interest rates, such as the US Federal Reserve has cut up to 175 basis points. Secondly, the govt. of every nation should follow unconventional fiscal and monetary policy measures such as the Central banks of all nations could purchase corporate bonds. This will prevent businesses from collapsing and therefore inhibit unemployment rates from rising. Monetization of deficit and ‘helicopter drop’ (injecting liquidity in the economy) are also some appropriate policy recommendation. Thirdly, Nations should focus on healthcare infrastructure so that if the second wave of the pandemic occurs, economic activities in different countries can resume with the support of a strong healthcare system.
Additionally, Countries should follow a four branched recovery plan that include, freezing of debt for distressed economies, State-led capital controls to reduce cash shortage, large investments in poor countries to improve upon their healthcare. It is also suggested that nation should closely work with behavioural insight teams and nudge units to step up their actions of incorporating nudges and behavioural economics as preventive strategies against COVID-19 and to steer decision making of all individuals towards desirable results, especially during lockdowns.
Moreover, terms of credit on existing loans should be made more flexible and responsive to the borrowers’ needs and current situation and this can be done by cutting interest rates so as to increase the disposable income of households and firms, leading to higher spending. Lastly, Coherent, coordinated, and credible policy responses could provide the best chance at limiting the economic fallout from what is already and sadly a human tragedy.