Is the global economy headed for recession? Businesses impacted

  • IASbaba
  • March 16, 2020
  • 0
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International Affairs

Topic: General Studies 3:

  • Policies and politics of developed and developing countries on India’s interests

Is the global economy headed for recession? Businesses impacted

Context: 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?

  • 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 as of March 15th 2020

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
  • Rabobank has stated 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.
  • 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
  • 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

Why should the economy be affected?

  • If we 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

Which are the industries impacted?

  • When China was faced the COVID-19 outbreak, the Indian pharmaceutical, automobile and mobile phone industries were immediately impacted.
  • 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 2020
  • 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.
  • The Indian gem and jewellery makers are impacted due to the partial closure of the Chinese and Hong Kong markets (which accounts for 70% of India’s exports), which is likely to result in a loss of about $1-billion by April 2020. 
  • Software Services: 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. 
  • Security and safe health of employees have been at the top of priorities rather than the pricing of a technology contract
  • Entertainment and Sport: The very popular Indian Premier League has been postponed. In football, all Union of European Football Association (UEFA) competitions have been postponed. Same is with US sports.

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.
  • The impact on profits of — and jobs at — airlines, airport authorities and oil marketing companies is obvious and immediate
  • It has also impacted the economy around air travel — the vendor of shops and outlets in the Airport & surrounding region.
  • Boeing executives have indicated there had been a 50% reduction in daily flight count in the Asia-Pacific region. 

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.
  • Digital shopping may see even more traction. 
  • It is said that after the 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. 
  • With schools shutting down temporarily, online learning platforms are likely to get a boost.

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

  • 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. Ex: Postponing a vacation
  • 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 during this slowdown
  • For instance: 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.

Has the Central Banks done anything?

  • 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.
  • Nevertheless, 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. 
  • Likewise, 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

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