COVID-19 Repercussions on Global Economy Are Becoming More Alarming

Published March 10th, 2020 - 08:09 GMT
COVID-19 Repercussions on Global Economy Are Becoming More Alarming
China, the world’s second-largest economy behind the US, was first to report the Covid-19 cases. (Shutterstock)
Highlights
From airlines to manufacturers, businesses are bracing for the impact of falling demand.

Just as has happened in previous instances of international crisis, it is the airline industry that takes the first hit from the economic and social disruptions being caused by the novel coronavirus. 

As the British regional carrier Flybe announced it was shutting its operations in the wake of bankruptcy, the International Air Transport Association (IATA) sounded the alarm that losses to the aviation industry could top $113 billion. 

Flybe was already facing financial issues and was on life support in the shape of government assistance in the UK. But it has clearly suffered from the drop in passenger traffic just as airlines around the world are experiencing. 

From the German carrier Lufthansa to Hong Kong-based Cathay Pacific, many are struggling to fill seats as people avoid travelling, especially to cities where the Covid-19, the disease caused by the coronavirus, cases are on the rise. 

America’s United Airlines says it has seen a 100 percent decline in near-term demand to China, and a 75 percent drop in demand on the rest of its trans-Pacific routes, according to a report by JP Morgan. 

Running an airline is a tough business. Surges in fuel price quickly erode profit margins. Aircraft are often leased or bought on loans, which means they have to be continuously operated to pay off the charges. 

In many countries, airline staff are unionised with the pilots and engineers enjoying good perks. Retrenchment to cut back costs can be a challenge in times of crisis. 

What has defined the impact of Covid-19 over outbreaks such as the SARS in the early 2000s is China’s bigger role in the global economy. 

“SARS experience underestimates today’s impact because China’s economic size is now much greater,” a recent IATA assessment notes. 

It says that China’s share in the global economy has jumped to 16 percent in 2018 from four percent in 2002 while that of manufacturing increased to 39 percent against 10 percent in the same period. 

Where does it go from here? 

China, the world’s second-largest economy behind the US, was first to report the Covid-19 cases. 

With more than 3,000 deaths, it has also suffered the biggest impact. But as authorities have quarantined cities and asked people to stay indoors in many cities and towns, workers haven’t been able to show up for work. 

Chinese factories have slowed output to the lowest since 2004, when the authorities began collecting data.

Many global companies such as iPhone maker Apple rely on Chinese suppliers. Disruption in supplies can have a knock-on effect. China is also a major market for Apple products and many other global companies. 

While the tech giant has already warned against falling revenues in the short term, its CEO Tim Cook has encouraged employees to work from home if their job allows them. 

Outside of China, Covid-19 has killed dozens in Iran, raising concerns that developing countries won’t be able to contain the outbreak and its fallout.  

The virus has already wiped $50 billion from global exports in February.  

Analysts fear that the virus could result in a recession if it worsens any further, causing businesses to shut down and people to lose jobs. 

Stocks are down, companies are putting a hold on their plans to invest and the demand for safer assets such as US treasury securities is high. 

“If the coronavirus outbreak becomes a global pandemic, the consequences will be much more severe, with GDP tumbling 1.7 percentage points relative to a no-virus scenario. The total output loss would surpass $300 billion in the resulting recession, with more than 1.5 million individuals losing their jobs,” Lydia Boussour and Gregory Daco, US economists at Oxford Economics, told Barrons. 

What can be done? 

The World Bank has set aside $12 billion in emergency funds for governments to boost their health infrastructure. Similarly, the International Monetary Fund (IMF) says it has set aside $50 billion for low-income and emerging economies. 

The central banks can’t do much as interest rates are already low in major economies. Even before the crisis, there were concerns that low-interest rates weren't helping to boost global GDP. 

Analysts say that governments in the US, Japan and the European Union can offer tax cuts to help businesses and directly inject money into hospitals as a way to contain the virus and its impact. 

Another step that can especially help small businesses is a way to compensate workers who don’t have paid sick leave. 

In America, a quarter of the workforce doesn’t have paid sick leave and in Italy a fifth of the workforce doesn’t have the luxury to call in sick, according to The Economist

Mandatory lockdowns can have drastic consequences on these people.  


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