The Post Pandemic Economy
Its life itself that is affected profoundly so that it has extended to every level of human experience. Emotional and psychological, to begin with, and from there to what we go about doing with our daily lives; may it be going out with friends or a casual movie-date or essentially trying to survive or thrive.
It all started on March 11, 2020, when the WHO declared COVID-19 as a pandemic at a point when its impact was being felt across the globe, by the 7.8 billion humans living on the planet, with an overwhelming majority of them in no position to help themselves. In such an evolving crisis, when no one is able to say for sure when it will be contained and what its long-term impact could be, the stress will be placed unequally on the individual and society, and on the government — which takes the responsibility for anticipating risk and putting in the structural measures. It, therefore, presents an opportunity to re-imagine the global division of labour and the international economic architecture.
So one might say the biggest saving grace has been technology — the internet and telecommunication; enabling a lot of people to be working around the globe without compromising or running a risk to their own and other people’s health in their pursuit to keep working and the economy ticking.
Still, that’s only a buffer. A lot of our economic life still unfolds offline. That’s why chief economists across the globe feel that the impact will be stark: COVID-19 has already affected several nations, including the main drivers of the world economy — the US and Europe, China and Japan. It does look like that growth for 2020 could be in the region of 1 per cent — from the 2.25 per cent expected earlier, going by the way the virus has spread, affecting global output and trade in both goods and services. Reports also point out that about one-third of the economic losses will be direct costs: from loss of life, workplace closures and quarantines. The remaining two-thirds will be indirect, reflecting a retrenchment in consumer confidence and business behaviour and a tightening in financial markets.
Demand will suffer as consumers cut spending throughout the year. In the most affected sectors, one can expect higher corporate layoffs and bankruptcies throughout 2020, feeding a self-reinforcing downward spiral. The financial system will suffer significant distress too, but a full-scale banking crisis will most likely be averted because of the strong capitalization and the macro-prudential supervision now in place. Yet, our fiscal and monetary policy responses may prove insufficient to break the downward spiral. Especially given that the global economic impact is severe, expected to exceed the 2008 crisis on the scale. According to the International Monetary Fund (IMF), the global economy is expected to shrink by over 3 per cent in 2020 — the steepest slowdown since the Great Depression of the 1930s. One can also expect the GDP to contract significantly in most major economies in 2020, and for any sign of recovery to begin only in Q2 2021 — a year from now!
In response to the pandemic, several countries across the world have resorted to lockdowns to “flatten the curve” of the infection. These lockdowns meant confining millions of citizens to their homes, shutting down businesses and ceasing almost all economic activity
Now, as some countries lift restrictions and gradually restart their economies, here’s a look at how the pandemic has affected them and how they have coped.
How hard have countries been hit?
- An early analysis by the IMF reveals that the manufacturing output in many countries has gone done, which reflects a fall in external demand and growing expectations of a fall in domestic demand.
- In the US, Covid-19-related disruptions have led to millions filing for unemployment benefits. In April alone, the figures were at 20.5 million, and are expected to rise as the impact of the pandemic on the US labour market worsens. As per a Reuters report, since March 21, more than 36 million have filed for unemployment benefits, which is almost a quarter of the working-age population.
- Advanced economies have been hit harder, and together they are expected to grow by -6 per cent in 2020. Emerging markets and developing economies are expected to contract by -1 per cent. If China is excluded from this pool of countries, the growth rate for 2020 is expected to be -2.2 per cent.
- China’s GDP dropped by 3.66 per cent in the first quarter of 2020, while South Korea’s output fell by 5.5 per cent since the country didn’t impose a lockdown but followed a strategy of aggressive testing, contact tracing and quarantining.
- In Europe, the GDP's of France, Spain and Italy fell by 21.3, 19.2 and 17.5 per cent respectively.
- In Asia, countries including India, China, Indonesia, Japan, Singapore and South Korea account for about 85 per cent of all the Covid-19 cases on the continent.
- · In India, Finance Minister Nirmala Sitharaman has announced some details of the Atmanirbhar Bharat Abhiyan package, to provide relief to Medium, Small and Micro Enterprises (MSMEs) in the form of an increase in credit guarantees. Govt decided to lift its monopoly on coal and make it available on market prices, boost private participation in space activities and increase the FDI limit in defence manufacturing under the automatic route from 49 per cent to 74 per cent. In short, the government of India has decided to provide a predictable policy and regulatory environment to private players.
Let’s now take a look at how the key sectors in the economy have been affected
1. Oil and natural gas
Due to the fall in travel, global industrial activity has been affected. Oil prices fell further in March as the transportation section, which accounts for 60 per cent of the oil demand, was hit due to several countries imposing lockdowns.
Not only oil, early this year in China, due to Covid-19-related containment measures, but the demand for natural gas also fell, as a result of which many Chinese LNG buyers halted their imports as storage tanks filled.
2. Industrial Metals
Due to lockdowns in China, followed by in the US and Europe, the demand for industrial metals reduced as factories shut down. As per IMF, China accounts for roughly half of the global demand for industrial metals.
3. Food and beverages
IMF projects a decrease in food prices by 2.6 per cent in 2020, caused by supply chain disruptions, border delays, food security concerns in regions affected by Covid-19 and export restrictions.
In the lockdown period, while the price of cereals, oranges, seafood and arabica coffee has increased, prices of tea, meat, wool and cotton have declined. Further, the decline in oil prices has put downward pressure on the prices for palm oil, soy oil, sugar and corn.
4. Education
The COVID-19 has resulted in schools shut all across the world. Globally, over 1.2 billion children are out of the classroom.
As a result, education has changed dramatically, with the distinctive rise of e-learning, whereby teaching is undertaken remotely and on digital platforms.
Research suggests that online learning has been shown to increase retention of information, and take less time, meaning the changes coronavirus have caused might be here to stay.
While countries are at different points in their COVID-19 infection rates, worldwide there are currently more than 1.2 billion children in 186 countries affected by school closures due to the pandemic. In Denmark, children up to the age of 11 are returning to nurseries and schools after initially closing on 12 March, but in, South Korea students are responding to roll calls from their teachers online.
What could be done?
Purchasing fire insurance for your house is not a waste in all the years that your house is not on fire. Rather, it is a precaution that gives you peace of mind, well worth the cost of the insurance premium. Insuring against a pandemic is no different. The only way to do this is twofold: (1) invest in adequate public health capacity and (2) invest in diversifying our global supply chains, making them less reliant on physically interactive processes. The investment required is tiny in comparison to the vast sums that governments are now spending in their misguided attempt to help their citizens preserve the status quo.
Well COVID-19 does not respect national borders. This means that as long as there is an exchange of people and goods across borders — something that is absolutely essential in our integrated global economy — the virus will roam the world. In practice, it is impossible to trace all infected people and moving objects — particularly in view of the long dormancy and incubation periods for this virus — and to stop them from infecting others.
The only way to defeat the virus in one country is to defeat it everywhere. The world community understood this with regard to the eradication of polio but has forgotten it in the current pandemic. Though governments should be pooling their resources to contain the virus worldwide, nothing could be further from current political reality. Do the leaders of the advanced industrialized countries seriously believe that their citizens will be safe as long as the virus is free to overwhelm the less-developed countries? If there was ever an event that proves beyond a shadow of a doubt the importance of multilateral cooperation, this pandemic is it. Without multilateral-ism, people everywhere will continue to die — the old, the vulnerable, doctors, nurses, school teachers, and so on — until the virus has run its grim course until herd immunity has been established everywhere, or until a vaccine is made available to the public everywhere.
The third lesson that is yet to be learned is that the economic fallout should not be fought with the same policies that we use to contain economic recessions, such as the last financial crisis. We are not facing the Great Depression, but rather something new. Aggregate demand is not falling everywhere. Instead, all the economic activities that involve physical interactions — for both production and consumption — are imploding, whereas the physically disjointed activities are exploding. Restaurants are shutting while Amazon delivery services are going through the roof and are still falling short of demand.
To deal with this new economic crisis, we need to encourage people to leave the jobs that have already been destroyed and take the jobs that are being created. For this purpose, active labour market policies are called for. Instead of spending trillions on making up for wages, salaries, and self-employment incomes generated by work that no longer exists and won’t exist for a long time — since this pandemic has a long way to go before an effective vaccine reaches the public or herd immunity sets in — governments should be subsidizing the movement from the contracting sectors into the expanding sectors. Hiring and retaining subsidies, relocation benefits, and investment credits for transforming production processes from physically integrated to physically disjointed activities would be appropriate. In the short run, the number of jobs that are disappearing in the physically integrated sectors far exceeds the number of jobs appearing in the physically disjointed sectors.
In addition to all of this the federal government as an issuer of the currency, however, and with interest rates at nearly zero, has the ability to ensure the economy survives difficult times. In other words, the federal budget isn’t like a family budget. In our businesses or family budget, we can’t spend more if our incomes reduce significantly. The federal government, however, can legislate and then spend funds directly into the economy to ensure we survive this massive shakeup.
It would be profoundly misguided to argue that this crisis will pass soon and that such pandemics are highly unusual so that all we need is some government support to tide us over this temporary rough patch. Now that the threat has become reality, only the most irresponsible of governments would deny that their citizens should be insured against such catastrophic outcomes in the future. With appropriate measures and policies, we can fight this battle together.
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