While it is almost impossible to say what the economic damage from the global pandemic of the new Coronavirus (COVID-19) will be, there is a widespread belief that it will have serious negative consequences for the world economy.
Early estimates suggest that if the virus were to become a global pandemic, most significant economies would lose at least 2.4% of their gross domestic product (GDP) value during 2020, which has already led economists to reduce their projections for global economic growth in 2020 from about 3.0% to 2.4%.
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The world GDP in 2019 was estimated to be about 86.6 trillion U.S. dollars, which is a mere 0.4% reduction in the economic growth of almost 3.5 trillion U.S. dollars in lost economic productivity.
The economic effects and damage caused by the COVID-19 pandemic are primarily due to falling demand, which means that consumers are unable to purchase goods and services available in the global economy.
What are the main impacts of the COVID-19 pandemic on the global economy?
COVID-19 can affect the global economy through many channels:
Direct Impact On Production
Chinese production has already been severely affected by the shutdown in the Hubei Province and a few other areas. Many other countries are also beginning to feel the direct impact, as their authorities are taking similar measures.
The slowdown of activity in China is affecting exporters to China. According to the World Bank, the largest sources of Chinese imports are Korea, Japan, and other Asian countries.
Thus, even without new outbreaks, these areas experienced slow growth in the first half of 2020.
Disruption Of Market And Supply Chain
Many manufacturing firms rely on imported goods from China and other countries affected by the disease. They also rely on sales in China for financial purposes.
The slowdown of economic activity and transport restrictions in the affected countries are likely to affect the production and profitability of specific global firms, especially for manufacturing and the raw materials used in production.
The level of the impact may depend on how quickly the outbreak fades for companies that rely on intermediate goods from COVID-19 affected regions and cannot easily switch to other sources.
Small and medium-sized companies may find it more difficult to survive an outbreak. Travel and tourism businesses face losses that will most likely not be recouped.
Financial Impact On Firms And Financial Markets
Temporary interruptions of inputs and production can be stressful for some companies, especially those that do not have sufficient liquidity. Traders in the financial markets may correctly anticipate or misunderstand which companies may be vulnerable.
The resulting risk may indicate that one or more key players in the financial market have taken unprofitable investment positions in the current environment, further weakening confidence in financial instruments and markets.
A possible (probably unlikely) event could be a significant disruption in the financial market as participants become concerned about counterparty risk. A slightly more likely possibility is a substantial drop in stock and corporate bond markets, with investors choosing to hold government securities (particularly U.S. Treasury bonds) because of the uncertainty caused by the pandemic.
What does this mean for individuals? With the outbreak of the COVID-19 pandemic, there has been a significant increase in online fraud. These include an increasing number of fraudulent financial offers in which scammers pretend to be banks, investors, or debt collectors, with offers to steal financial information.
It is not very difficult to understand why the crisis may become an open door for fraud. The combination of health and financial threats makes people who have never even heard before of trading scams more vulnerable and creates opportunities for scammers.
Legal Issues And Considerations
Companies should review their material business contracts to determine how the Coronavirus will affect their rights, duties, and business relationships.
There is an anticipated upsurge in litigation related to material adverse change clauses and force majeure clauses, as well as other legal grounds for not performing commercial contracts, such as disappointment in purpose.
Companies should be aware of notice provisions in their contracts relating to these and other clauses, including provisions for the payment of liquidated damages and extension of the term.
Also, public companies will be subject to adequate disclosure requirements regarding the impact of the outbreak on their operations.
Insurers and policyholders will be required to assess policies for appropriate coverage and exclusions related to interruptions, travel, cancellation of events, and employee compensation policies.
Employers are expected to provide employees with a safe working environment free from recognized hazards that cause or are likely to cause disease, death, or serious physical harm.
Employers should consider preventive measures to maintain the safety and protection of their employees during a coronavirus outbreak.
The strategy should also consider flexible working arrangements and paid leave to cover any gaps not covered by the sick leave policy.
These potential scenarios are merely descriptive ideas about possible routes of the disease outbreak as well as the global economy.
The Worst Is Over
Transmission in China has already slowed down. Although some individual outbreaks occur elsewhere, they do not lead to a massive spread of the disease.
As the number of cases in the world stabilizes, China’s economy is returning to normal. Some areas, such as Iran, the effects are negligible, which is of little importance to the world economy.
In the 1st quarter of 2020, China’s GDP was severely affected but bounced back in the 2nd and 3rd quarters as some of the lost production was never replaced.
Particular companies outside China experience short-term supply disruptions. However, the impact on the world economy is small and temporary.
The Year Of The Virus
The spread of the disease in China is slowing down. However, outbreaks are occurring all over the world.
Each outbreak requires a hindrance in production in that area and the globalized world, meaning that as outbreaks occur and are controlled, they occur in different regions and industries.
The overall impact is that the disruption of economic activity is sufficient to significantly slow global growth. Enterprises that are fast enough to manage shifts in suppliers and have sufficient liquidity to survive periods of low revenue and sales will have a competitive advantage.
Global Pandemic Response
Economic centers around the world are being closed in Wuhan-style as people panic about the virus spreading. Uncoordinated decisions in each country disrupt the movement of both people and goods.
Global production is declining, as businesses with international supply chains can only operate intermittently. Tourism and related businesses are shrinking drastically, and tourism-related businesses and regions are suffering.
It will probably take more than a year for the World Health Organization and the United Nations to develop a globally accepted response that prioritizes health measures based on efficiency and cost for the wider economy, and for these responses to be implemented in the major world economies.
A global stagnation in GDP, a fall in international trade, and a global recession are all authentic opportunities.
Delays in shipments and production schedules cause financial problems for heavily indebted companies, especially in the United States.
The shrinking global stock markets and the flight of investors selling assets such as high-yielding bonds and volatile stocks put investors at risk of underpricing.
Concerns about counterparty risk accelerate the decline and drain liquidity in financial markets. Central banks are trying to cope with this problem. Financial markets and the world economy are recovering from the V-shaped recession.
To Sum It Up
It is quite difficult to determine precisely what impact coronavirus will have on the world economy. However, it is clear that its impact will be significant and widespread. It looks like the worst is yet to come.
Investors around the world are carefully monitoring the impact of Coronavirus on world markets. The U.S. stock market has shown considerable volatility as well as the Dow Jones Industrial Average.
Even if the tide changes rapidly and the virus spread is halted, the impact is likely to be prolonged.
Some businesses with thin margins and weak balance sheets will be forced out of business. Others may have to consider bankruptcy protection to address liquidity problems or supply chain and supplier failures.