Need of the hour

Economists world over are talking of the possible consequences of the sudden outbreak of the Coronavirus on the global economy. While many are comparing the current crisis with the 2008 financial meltdown, others are seeking lessons from earlier instances of large scale epidemics.

Some simulations and models are already running and estimates are being spewed out. In a recent modelling exercise done by some Australian specialist and deliberated at the Brookings Institute, it is estimated that as of now, the global economy should be hit by $2.3 trillion as a result of the outbreak.

A similar epidemic had sparked out of China some twenty or so years back. The SARS epidemic had cost the Chinese some $40 billion over the course of a short span of its ravage. But then, it is argued, the Chinese economy accounted for a much smaller part of the global economy while now it is as much as 17 per cent of global GDP.

China is now an integral part of the international value chain and disruption in that country will have possible a multiplier impact. Given the figures for January and February, both imports and exports of China, as well as domestic consumption, seems to be have been badly hit.

China is claiming to have contained the spread and is already talking about countermeasures to recover. But it appears even there the options are not many. All Chinese attempts at providing stimulus have been in the form of creation of capacity — in infrastructure, in housing and whatnot. But how long can you go on creating unused and empty houses and bridges?

What needs to be done is not certain. Widely respected and former Chief Economist of the World Bank and also former-Chief Economic Adviser to the Government of India, Professor Kaushik Basu has suggested the creation of a Committee of 20 — C20, for short — comprised of leading economists, including some Nobel laureates.

C20 should be tasked with finding measures for recalibrating the global economy and maintaining its pace in the aftermath of the virus pandemic in a time-bound manner. It should continue its deliberations, maybe, for a year and thereafter could be disbanded.

Raghuram Rajan had earlier suggested that the first priority was to arrest the spread of the disease and stop its severity before thinking of measures to stimulate economies.

But some outlines of the aftermath are already emerging. It is not known how long the pandemic will last and with what severity. But the loss of employment from the short spurt in disease outbreak could be substantial. The extent of the loss will be clear from the time it pushes countries into becoming isolated islands.

The international aviation industry appears to be the first casualty. The airline companies are even now operating empty flights across continents but for how long? Cancelled flights and operations are estimated to cost the aviation industry $113 billion, according to estimates of the Air Transport Association. With the ban in north Atlantic travels — which is the busiest operational routes — continuing, the toll will further rise.

Aircraft manufacturing, which is now a global duopoly, has been facing rough weather for some time. The unsatisfactory performance of the mammoth A380 had hurt the finances of Airbus Industrie which had already decided to discontinue its production.

Boeing, on the other hand, had been saddled with the damaging performance of its ambitious new offering 737 MAX. The aircraft production has come close to a halt. Without a quantum jump in firm orders, Boeing will face a serious problem.

But both these companies will now face possible cancellation of orders rather than fresh orders.

Hotels are facing large scale cancellations and this will leave its imprint on employment as well. From the permanent staff to the casual drivers and smaller eateries, all will be affected. Major tourism centres in the country, more particularly in Rajasthan, have started feeling the pinch. Springtime is a traditionally heavy rush period and that will leave a big dent in the incomes of the smaller organisations.

In Italy, which is a huge touristic attraction for people in Western Europe and North America, the reports are coming out almost every day about empty restaurants and hotels. Other destinations, like Swiss slopes and Caribbean beaches are facing the same lack of visitors.

Chinese tourists, who spent close to $300 billion in foreign travel a year, are fewer to be noticed now. Apart from their unwillingness to travel, the host countries are turning out to be hostile. There have been reports of attacks on Chinese or Chinese looking people in major western cities, including in New York and other metropolises in America.

Manufacturing industries in China have suffered badly and a range of products from cars to mobile phones are seeing lower numbers. It is not easy to ramp up production after such a massive disruption. And already people are talking of alternative centres for production instead of putting everything in one country.

In the medium to long term, manufacturing industries will witness major restructuring and changed geographical distribution of their bases. Many South-East Asian countries will see new manufacturing capacities being put up. But that will be only in the long term. Meanwhile, the established global supply chains, which had come up during the course of sing-along globalisation, will be disrupted.

The consequent loss in employment and income creation across sectors will depress consumer spending and demand. This will be the biggest worry as an established system had been affected. Worst, the mind frame which had come to accept the state of things as given, has now been given a rude jolt.

Some manifestations of this are being seen in the financial markets and their wild gyrations. These will, in turn, be transmitted to the physical economy, further aggravating the recession and slow down activity. There will be multifarious losses. Professor Basu mentions the impact of force majeure clause in any contract under which one of the contracting party escapes from fulfilling its part of the contract on account of unforeseen circumstances.

Already, according to data available, the Chinese industry apex body has issued certificates to its members for force majeure worth $53 billion. These would be dead losses for the counter-party. All these will result in a huge pile-up of non-performing assets of banks. That is the worst fear. A disruption of the global banking system could be the worst blow the system can endure. Maybe, the proposed C20 should start working on different fronts and formulates measures to counter disruptive trends. That should be done as soon as possible.

Views expressed are strictly personal