The novel coronavirus (COVID-19) continues to make the headlines while expanding its spread globally to a pandemic scale during the last two months. While China is slowly recovering from its crisis, a second and seemingly much more severe wave is taking over Europe, America and Africa, as well as South-East Asia, causing socially and economically unabated damage. Six out of ten of the world’s largest economies are also in the top countries most severely hit by the virus (i.e. the US, Italy, China, Germany, France and the UK, by number of cases). The number of infected has increased more than nine times, while the death toll rose 18 times during February-March. The situation is evolving unpredictably; making scenario forecasts obsolete in a matter of days.
The overall global economy is attacked on multiple fronts through the full lockdown of many of the world’s leading economies. For manufacturing, direct and indirect disruptions have hindered supply chains as the disease forces factories in many of the world’s production hubs to close down and put others, in less-affected areas, into a supply-side dilemma due to a shortage of necessary inputs. From a demand perspective, while demand stays high in essential goods (i.e. food, medical equipment and health supplies), the aggregate demand has dropped as consumers are secluded at home in an effort to contain the disease’s further outspread and flatten the epidemiological curve. The services sector has been severely hit since the early days of the outbreak, starting with tourism, travel and hospitality, and the situation is getting worse due to increasing quarantines, restrictions and unemployment. Companies are delaying or postponing new hires, and in even worse cases, implementing massive layoffs due to losses of revenue and increasing debts. In the US alone, the unemployment claims during the last week of March hit a record level of 3.28 million, while the International Labor Organisation (ILO) estimated 212.7 million people would be out of work globally in the worst-case scenario.
Food insecurity is another severe outlook that has received too little attention so far. Although there have been reports of empty shelves in supermarkets across the world, these occurrences are usually the results of overreaction by a fraction of the population in a highly-infected region and not an omen of food insecurity. However, more worrisome is the impeded movements of production inputs (such as fertilisers, veterinary medicines, seedlings, animal feed, etc.) caused by logistics blockages, reduced access to the market for perishable commodities due to quarantines, potential labour shortages for a mostly labor-intensive agricultural sector, lowered demand from the food processing sector, not to mention the locust outbreak in the Horn of Africa. The immediate and most direct victims will be smallholder farmers, but if the situation gets worse, the plight will fall upon almost every single individual. The Food and Agriculture Organisation (FAO) has alerted policymakers around the world to be careful not to turn this health crisis into an entirely avoidable food crisis as was the case in 2007-08.
COVID-19 has not only distorted trade flows but also beggar-thy-neighbour trade policies. Facing multiple difficulties and shortages of essential resources to fight against the disease, many countries are turning to mercantilist forms of protectionism, albeit temporarily. Allowed by exceptions to protect public health or public safety under World Trade Organisation (WTO) multilateral agreements, regulators around the world have been adopting trade-related measures to deal with the actual or soon-to-be shortage of medical supplies. According to the WTO Secretariat, 26 trade and trade-related measures, 9 of which are export bans, have been officially reported by WTO member countries as they try to secure domestic stock for personal protective equipment and pharmaceutical products during this crisis. The real number could be even higher, as governments use more subtle, un-reported means of export curbs, such as export limits or export authorisation rules.
Economists are warning about the possibility of a global recession caused by COVID-19. The ILO estimated a rise in global unemployment of between 5.3 million (“low” scenario) and 24.7 million (“high” scenario) from a base level of 188 million in 2019. Rising unemployment, in its turn, will affect consumption, creating a vicious circle of low production-low consumption. According to a model developed by McKinsey and Oxford Economics, global economic growth might sharply fall from the 2.5 per cent of pre-virus scenario to 1.5 – 0.5 per cent, or a decrease by USD 400 billion to USD 800 billion, under a pandemic and recession scenario. Deutsche Bank put out a more dismal forecast, with US GDP to be cut by 13 per cent in the second quarter of 2020, and China could see its GDP shrink by 31 per cent in the first quarter. Paraphrasing Professor Richard Baldwin, “Go big. Act fast. Keep the lights on,” will limit the damage from the intentional and unavoidable recession. At the same time, longer-term damage can be avoided with rational economic moves. Such policy choices are sober and critical when weighing up lives and health on one hand and economic growth on the other.
Besides strict restrictions aiming to flatten the progression of the virus (the so-called epidemic-curve), countries are rolling out measures to shield the economy from long-term damage. Last week, the US passed through Congress a massive USD 2 trillion coronavirus response package covering, among others, individual aid payment, food assistance, expansion of unemployment insurance, public health and social emergency fund and business loans. The European Central Bank announced a bond-buying scheme worth EUR 750 billion to provide EU members with increased liquidity. At the same time, Germany is financing a EUR 750 billion stimulus package, Spain announced a EUR 200 billion relief package, France unveiled a EUR 45 billion aid package, while Singapore set aside a total of USD 37.5 billion for a support package, and so on. Many others are also providing tax relief and support packages to businesses and citizens. Some might doubt such a Keynesian approach, but those stimulus packages will prove their value in ensuring that companies do not go bankrupt, employment is secured, and the economy will return to the normal stage once the virus-triggered crisis is over.
While some countries seek a blockade in trade, the reality is that the world will need trade to overcome this crisis. On the future of international free trade, the remark by the WTO Director-General Roberto Azevêdo on 25 March might serve well as an encouragement: “No country is self-sufficient, no matter how powerful or advanced it may be… Keeping trade and investment flowing will be critical to keep shelves plentiful and prices affordable… Once the medical crisis begins to recede, trade will allow countries to help each other grow, bringing faster and stronger economic recovery for all of us.”
Paul Baker is the Founder and CEO of International Economics Consulting (IEC) Ltd. At IEC, we provide essential tools to simulate and assess the impact of various disruptors on your business. We can help to devise business strategies to enhance your international competitiveness by drawing on our experience advising Clients in over 80 countries around the world. For more information, please contact our Senior Analytics Manager, Mr Arvind Kureeman at Kureeman@tradeeconomics.com.