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Is the global economy headed for recession?

How deep has the impact of COVID-19 been on businesses around the world? And which are the ones that have been hit the hardest?

March 15, 2020 12:02 am | Updated 01:51 pm IST

The story so far: The global death toll due to COVID-19 has crossed the 5,300 mark, with over 1.42 lakh people infected. India, where 88 people have been infected, saw two casualties when a 76-year old man died in Karnataka and a 68-year-old woman died in Delhi this week. A diverse set of industries has been impacted by the spread of the virus. With daily news reports painting a dismal picture of supply chains affected, it is easy to visualise the global economy virtually grinding to a halt .

What does it mean to the global economy?

Analysts fear that the global economy may tip into a recession unless the virus turns out to be seasonal. (A recession sets in when the economy shows two consecutive quarters of contraction.)

The problem with current predictions is no one knows how long the virus will remain potent, how authorities around the world are able to stanch new cases and the resources they pull out to treat old ones. What business hates is uncertainty and uncertainty is the only thing that abounds when it comes to predictions about the vitality, endurance and longevity of the new virus.

Rabobank has been cited in the media as saying that a global recession now is all but certain. It has predicted global GDP growth to be 1.6% for 2020, a figure that was 2.9% the last year, as per IMF estimates.

Also read:What can India do to overcome the global slowdown?

Economists from Nomura have warned that a global recession might be inevitable.

This year, in early March, the Institute for International Finance had said that global economic growth could turn out to be as low as 1%, and this was even before the OPEC club and Russia fell out on production agreements to maintain stable oil prices. Oil prices have had a free fall, sending stock markets into a tizzy. The UN’s United Nations Conference on Trade and Development (UNCTAD), said the virus outbreak could cost the global economy up to $2-trillion this year and that the pandemic could cause a recession in some countries causing global economic growth to clock in below 2.5%.

Why should the economy be affected?

If you engage less with the outer world, and avoid work, education, fitness and entertainment, a lot less economic activity would occur. Businesses face the challenge of disrupted supply of components to make products, or of having to shut some of their factories temporarily, not to mention large swathes of the workforce having to be quarantined.

Also read: COVID-19 | Trade impact for India estimated at $348 million: UN report

Which are the industries impacted?

There is no industry that has experienced the impact. When China, with the disease’s epicentre in Wuhan, was brought to its knees, the Indian pharmaceutical, automobile and mobile phone industries, for example, immediately wobbled. India depends on China for supplies of components for products that these sectors make.

The Indian pharma industry, which depends on China for 70% of raw materials needed to manufacture drugs here, has seen input costs go up by 50% as of February this year. The pesticides sector is another that has been affected as manufacturers depend on China for raw materials. While there are comforting stock levels for now in India, farmers may soon face pesticide availability issues unless the situation resolves quickly.

Also read:Coronavirus, U.S.-EU trade war, Gulf tension biggest threats to global economy: EIU

The Indian gem and jewellery makers lament the partial closure of the Chinese and Hong Kong markets, which is likely to result in a loss of about $1-billion by April this year to the Indian sector which depends on these two foreign markets for 70% of its exports.

Even the software services industry, which so easily lends itself to working from remote locations, can only progress so far. Decision-making in the West, a key market for software services, may have been hit, with in-bound travel restricted and the U.S. declaring emergency. When a health challenge hits you, analysts say the pricing of a technology contract will not be top of the mind.

It is for this reason that the markets have barely taken note of regulators’ attempts to infuse funds into the global economy. A few days ago, the U.S. Federal Reserve held an emergency meeting and cut interest rates by a half percentage point. The stock markets reacted favourably for a short while before losing steam and spiralling downwards.

On Thursday, the Euro markets remained unmoved even after the European Central Bank announced fresh stimulus measures to help the economy cope with the growing cost of the COVID-19 epidemic. But, the U.S. declaring a state of emergency over the spread of the virus will help allocate the significant quantum of funds needed to deal with a health-care requirement of this magnitude. Investors reacted positively to this, and the U.S. markets zoomed in response.

How will it hit the travel sector?

Travel has been hit severely as countries issue advisories to eliminate unnecessary travel and go into lockdown mode. The U.S., for instance, has halted all in-bound travel from Europe. India has temporarily stopped grant of visas except for emergency situations.

Also read: Global recession likely if COVID-19 becomes pandemic: Moody’s Analytics

The impact on profits of — and jobs at — airlines, airport authorities and oil marketing companies is obvious and immediate, not to mention the economy around air travel — the vendor of coffee and sandwiches pays out a monthly premium to occupy prime airport space so that he can sell you a cappuccino and a sandwich when you pass by his counter.

At an aviation event in Hyderabad the past week, Boeing executives gave rough estimates indicating there had been a 50% reduction in daily flight count in the Asia-Pacific region. In normal times, mainland China would see 15,000 departures a day and at the peak of the virus the country was operating 3,000 flights a day. The rest of Asia-Pacific sees 5,000 flights operated in a day. “At one point we saw 2,500,” said a Boeing executive. As the virus spreads to other markets, airlines in Europe and the U.S. are bound to cut capacity.

When normalcy returns, wouldn’t pent-up demand make up for lack of economic activity now?

Take the example of shared mobility in India. Anecdotal evidence tells us that at steady state, cab drivers cannot quite afford to have their cabs out of circulation for even as short a period as a week, if they have to put food on the table for their families. Curtailed travel and commutes can be devastating for them unless the situation resolves quickly. Only some of the expenses that are being held back by consumers can be made up for later when pent-up demand is unleashed after the situation returns to normal. A postponed vacation may eventually see light of day. But micro-expenses, which contribute significantly to an economy, such as a cab fare or buying snacks for a commute, can never be made up for, once the sun sets that day.

Wouldn’t entertainment and sports offer a reprieve?

Entertainment via mass media has seen significant impact. The very popular Indian Premier League has been postponed. The South Africa-India cricket series has been cancelled. States such as Kerala have shut down cinema halls for this month. Indian movie releases have been postponed indefinitely.

Also read: Coronavirus live blog - March 14: Impact on sports

Globally, the picture is no different. In football, all Union of European Football Association (UEFA) competitions, including the Champions League and Europa League matches, have been postponed. Formula 1 has called off the first race of the season, the Australian Grand Prix. In golf, the PGA has cancelled its Players’ Championship.

The U.S. basketball association, the National Basketball Association (NBA) suspended its season’s events indefinitely while the body that conducts college championships for the sport, the National Collegiate Athletic Association (NCAA), has cancelled both its men’s and women’s upcoming events. The fate of the Summer Olympics in Tokyo is up in the air.

The iconic Disneyworld has brought down its shutters temporarily to help prevent the spread of the virus – it has shut shop earlier in its history: immediately after President Kennedy’s assassination in 1963, and post the 9/11 attacks in New York.

Is there a silver lining at all?

Sales of medical supplies, soaps, hand sanitisers and essentials to be stocked up at home will evidently rise.

It is said that after the Severe Acute Respiratory Syndrome (SARS) epidemic in China in 2003, shoppers began to prefer buying online, to avoid crowded spaces and that e-commerce major Alibaba’s fortunes zoomed after this. Digital shopping may see even more traction. With schools shutting down temporarily, online learning platforms are likely to get a boost.

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