A devolving outlook
COVID-19 threatens to affect the global economy at a scale which has not been witnessed in the modern age, write Saswati Chaudhuri & Biswajit Mandal
COVID-19, a new Coronavirus disease took hold of China in December-end. An Asian Development Bank (ADB) brief reported COVID-19 to be less dangerous than SARS (Severe Acute Respiratory Syndrome) which has a mortality rate of 10 per cent while the former's mortality rate varies among various age cohorts. The South Korean case reveals that the death rate in COVID-19 patients aged 80 and above was 10.4 per cent, compared to 5.35 per cent in patients in their 70s, 1.51 per cent in patients in the 60s, 0.37 per cent in those in the 50s. Even lower rates were seen in younger people, dropping to zero in those 29 and younger. Other countries have presented similar data. The first confirmed case outside mainland China occurred in Thailand, Japan and South Korea according to the World Health Organisation (WHO). By January end, amidst thousands of new cases in China, a "public health emergency of international concern" was officially declared by the WHO. Ultimately on March 12, WHO declared COVID-19 as a pandemic.
COVID-19 is a war which is mainly waged in the health sector but is going to have a far-reaching impact on the economic front too. The stock market is one of the many different factors considered while examining economic health. Stock markets worldwide have knocked rock bottom in recent times. It remains to be seen how the economies are going to react. But before that, we need to know what type of economic crisis can befall us.
Even though the major symptom of COVID-19 is the common-cold and flu-like symptoms, we are basically more concerned with its economic impact. It has the potential of slowing down not only the Chinese economy but also the global economy and the tremors are already being felt. UNCTAD had spelt it out in clear and simple terms when it announced that "any disruption of China's output is expected to have repercussions elsewhere through regional and global value chains". China has become the central manufacturing hub of many global business operations and a slowdown in Chinese production will naturally have ramifications in other countries. The primary reason is not only that these economies witness a significant share of Chinese tourists but China is also a major destination of their intermediate and final goods and services.
The Asian Development Bank has estimated the impact of COVID-19 under three plausible scenarios:
Suppose the Chinese outbreak is restricted relatively quickly and there is a relatively short-lived decline in the Chinese consumption growth of 0.7 percentage point for the year relative to a no-outbreak scenario. In this situation, the global impact would be to the tune of $77 billion or 0.1 percentage point of the global GDP.
Suppose the Chinese outbreak is more widespread and lasts longer and there is a 2 per cent point in Chinese consumption growth, the global impact would increase to 0.2 per cent of global GDP, implying a global loss of $156 billion.
If the Chinese outbreak is even more long-drawn-out, there would probably be a large decline in both consumption and investment growth in China, the global impact would increase to 0.4 per cent point of global GDP or a loss of $347 billion.
There are several channels through which the COVID-19 outbreak will affect economic activity in China, the rest of developing Asia and the world. A sharp but temporary decline in domestic consumption is unavoidable in all the outbreak-affected economies. The outbreak would obviously affect people's perceptions regarding future business activity and a probable decline in investment is again unavoidable. A decline in tourism and business travel is the most anticipated channel of interruption of economic activity. World Tourism Organisation throws up interesting figures. They analysed tourist arrivals from China as a share of total arrivals in various countries in 2018. Hong Kong tops the list with 68 per cent. Others high up on the list are Cambodia, Vietnam, Korea, Mongolia, Thailand and Myanmar. The COVID-19 outbreak would obviously lead to a considerable decline in Chinese tourists and also for those who wanted to take a transit route through China. Each of the following would also have a say as the world takes the much-dreaded path to the global recession viz. spillovers of weaker demand to other sectors and economies through trade and production linkages along with supply-side disruptions to production and trade.
To stall the march of the virus, various economies have already taken measures. Europe is going for full border closure. Eight European Union states have already introduced border controls. President Trump has announced a travel ban from most of Europe to the USA for 30 days. Argentina has announced that it would close its borders to all non-residents for at least two weeks. Australia, Canada, Chile, France, New Zealand, Saudi Arabia and Sri Lanka have followed suit. Thus, human mobility has been curbed. Textbook economics teaches us that such sanctions are accompanied by huge economic costs. This impact would be similar to the one noticed during the H1B visa restriction or during BREXIT. Global production or trade in goods and services would be adversely impacted. However, when national policies are responsible for the immobility of labour, a substitute process is also made handy. In this context, production cost rises but the supply chain does not get disrupted. But, when the root cause of all restrictions are health-related and that too like the one with COVID-19, then the pathways to an alternative production process no longer remains a viable option. When the mobility of resources like labour is restrained worldwide, production in a single particular economy does not get affected alone, it affects the global economy at large. We will witness a global price rise for all commodities and services very soon. Concurrently, we should not forget that 60 per cent of the value of international trade comes through the global value chain. Hence when the international movement of labour and other factors are restricted, the entire global production system will certainly be badly jostled. This will automatically trigger a global economic crisis. According to an ADB report, high-frequency indicators suggest that production in China as a whole fell to 50-60 per cent of normal levels but is now normalising. China is a global and regional hub for manufacturing and value chains. Many economies export a significant amount of intermediate goods to China and other economies use inputs from China in their production. Therefore, these temporary disruptions in China would cause a sudden slip in production and trade in other economies as well.
Besides, all health agencies and world leaders are advocating social distancing and self-isolation. The trade-off is now between a healthy world and a healthy economy. An economy sans healthy individuals can never exist and so the whole world is waging this health war. Obviously the worst sufferer would be the aggregate demand. Goods would be left unsold, losses would escalate and future investment would dwindle and a continuous retrenchment of employees would surface. On the other hand, perishable commodities would start to rot and farmers would be the ones most affected. A constricted supply environment would give birth to demand problems as everyone would become cautious while spending. The Indian economy is already spiralling downward and now would be severely affected in this scissor-like effect from both the demand and supply side.
For now, the International Labor Organisation estimated that the crisis could cause nearly 25 million job losses and drain up to $3.4 trillion in income by year's end. In a bid to put up a brave front, the USA has formally rolled out a $1 trillion fiscal stimulus plan to tide over the crisis. Australia has already announced an unprecedented $189 billion fiscal stimulus plan which is nearly 10 per cent of its GDP. The ECB President, Christine Lagarde rightly put it when she said "extraordinary times demand extraordinary action" and announced that the ECB would spend 750 billion euros in bond purchases to calm down sovereign debt markets. We can only hope that such a coordinated global response stands us in good stead.
Dr S Chaudhuri & Dr B Mandal are Associate Professors of Economics at St Xavier's College (Kolkata) and Visva-Bharti University (Santiniketan) respectively. Views expressed are strictly personal