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Finance Front Page Global Briefing In Focus

‘Coronomics’: How a Pandemic Can Impact World Economics

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In response to the developing coronavirus pandemic, Professor Miltos Makris of the University of Kent’s School of Economics explains the current and potential implications for the world economy.

Explainer: covid-19 and Worldwide Recession
‘The almost simultaneous lockdown of several countries will have a major negative impact on economic activity around the globe as the severe measures hit supply chains and consumer demand.

‘Given the extensive trade between the US, Europe and China with each other, and importantly with the rest of the world, this turmoil will have severe knock on effects to parts of the world where lockdowns have not yet been put in place, such as South American countries.

‘As a result, the world economy is likely to enter a deep recession this year.
‘Indicatively, the 2003 SARS epidemic has cost the global economy about 0.1% of world’s GDP, when China’s GDP was around 4% of the world’s GDP whereas now it is around 16% and its growth is the lowest it has been since 1990. This means that, owing to its greater international economic prevalence, China undergoing a severe downturn bodes worse for the global economy.

‘Fragile businesses will be facing the prospect of debt defaults with many of them shutting down. Bailing out the aviation and transportation sectors may also be necessary to ensure local and international supply chains and trade do not suffer a long run blow with long-lasting adverse economy-wide effects. Resources otherwise available for research and development, education and health may thus need to be re-channelled to boost economic activity and restore broken supply chains, with such re-channelling posing its own danger for long-run prosperity.

The economic impact of covid-19 on more mature economies
‘The covid-19 turmoil is expected to have severe consequences for the more advanced economies as they rely more on face-to-face service industries. People refraining from traveling, eating in restaurants, drinking in bars, going to the gym or sporting and music events, has far more serious implications for economies such as the US and the UK.

‘The reduction in disposable income and demand for goods and services by a large segment of the labour force will have knock-on effects to other sectors, such as the food industry and retail sector. Therefore, an economy-wide downturn is expected for the mature economies like Britain.

‘Preventing a painful recession is the crucial reason behind the emergency rate cut by the US Federal Reserve and the recent drastic cuts by the Bank of England as well as the multi-billion relief packages announced in the UK and elsewhere. Nevertheless, more drastic measures will be needed to prevent a long-lasting economic slump such as tax cuts and freezing of mortgage payments.

Covid-19 and the EU and Eurozone
‘The expected slowdown of European economies due to the pandemic has triggered fears of a new Eurozone debt crisis as evidence by the sudden increase in the Italian spread.

‘The fragile economies of the EU that have just come out of an unprecedented debt crisis or, as some are, still facing high unemployment (such as Spain and Greece respectively) will find it very difficult, financially and socially, to cope with another severe economic shock in so short a time. To make things worse, the EU’s relief coffers will be under profound pressure now that even the more robust economies, such as Germany and France, are facing a significant drop in domestic economic activity and are in need themselves of funding boosts to their own economies. The widespread recession in the EU is likely to last a long while, negatively affecting the position of the EU in the politico-economic stage in the post-virus era.

‘The UK’s prospects are not optimistic, especially given its trajectory to exit the EU. A big part of the UK’s economic plan to recover quickly from negative repercussions of Brexit was relying on sustaining UK-EU trade and expanding trade to the rest of the world. However, the expected slump in trade as well in domestic economies due to implications of covid-19, make this plan fragile and a prolonged and deep recession likely.

Covid-19 and the Financial Markets
‘Pessimism surrounding the threat to businesses at risk and potential debt defaults due to covid-19’s spread, has led investors to significantly reduce their demand for stocks, wiping trillions of dollars off stocks worldwide.

‘This major negative shock to the financial markets was compounded by an oil price war emerging between OPEC countries flooding the market at a time when energy demand has actually dropped due to impact of the covid-19 virus on transportation and economic economy in general around the world. The combined effect sent stocks sliding, reigniting fears for a worldwide financial meltdown.’

 

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