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Global Impact of COVID-19

Search 3rd March, 2020 Spotlight here: http://www.newsonair.com/Main_Audio_Bulletins_Search.aspx 

Topic: General Studies 2:

• Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.
• Issues relating to development and management of Social Sector/Services relating to Health.

In News: What started as an outbreak in China near the end of 2019 has now developed globally. 

• Last week, for the first time since the COVID-19 epidemic started, the number of new cases outside of China was greater than inside the country. By 1 March, the total number of confirmed COVID-19 cases in China was 80,565 (3,015 deaths) and in the rest of the world 14,768 (267 deaths).
• The evolution of the disease and its economic impact is highly uncertain which makes it difficult for policymakers to formulate an appropriate macroeconomic policy response.
• The data from many countries is not reliable due to a lack of testing capability, political expediency and the clinical characteristics, most notably a long incubation period of up to 12 days during which infected people may be asymptomatic. However, it is clear that this epidemic is growing exponentially.

Economic consequences

The 2003 SARS outbreak, which infected about 8,000 people and killed 774, cost the global economy an estimated US$50 billion. The 2015 MERS outbreak in South Korea, meanwhile, infected 200 people and killed 38, but led to estimated costs of US$8.5 billion. 

Already the coronavirus epidemic has had a greater economic effect than either of the predecessors. 

• Wall Street has joined a global sell-off; the S&P 500 index of US companies fell by 11.5% the week commencing on February 24, the worst week since the 2008 crisis. 
• China has effectively been in economic lockdown for a month since Chinese New Year, and the knock-on effect for global manufacturing has already been felt. 
• While sensible precautions to avoid the spread make sense, it’s all too easy for business and politicians to go into panic mode. 
• The supply chain consequences are real, however, and affect some sectors and assets more than others, from commodities such as oil to supply chains vulnerable to such interruptions as those that cause problems for just-in-time auto manufacturing.
• The fragility of the global economy, which has high levels of indebtedness and asset bubbles, is a legacy of the way in which the 2008 global credit crisis was managed rather than solved. As pointed out in the World Economic Forum’s Global Risks Report 2020, there are a number of tipping points in the economic system and the economic consequence of a shock to the global system is likely to be a correction.
• Mounting pressure to reduce supply chain costs motivated companies to pursue strategies such as lean manufacturing, offshoring, and outsourcing. Such cost-cutting measures mean that when there is a supply-chain disruption, manufacturing will stop quickly because of a lack of parts.

India is among the 15 most affected economies due to the COVID-19 epidemic and slowdown in production in China, with a trade impact of $348 million.

Consequences

Indirect hit to confidence (wealth effect): A classic transmission of exogenous shocks to the real economy is via financial markets (and more broadly financial conditions) — they become part of the problem. As markets fall and household wealth contracts, household savings rates move up and thus consumption must fall. This effect can be powerful, particularly in advanced economies where household exposure to the equity asset class is high, such as the U.S. That said, it would take both a steep (more bear market than correction) and sustained decline.

Direct hit to consumer confidence: While financial market performance and consumer confidence correlate strongly, long-run data also shows that consumer confidence can drop even when markets are up. Covid-19 appears to be a potentially potent direct hit on confidence, keeping consumers at home, weary of discretionary spending, and perhaps pessimistic about the longer term.

Supply-side shock: The above two channels are demand shocks, but there is additional transmission risk via supply disruption. As the virus shuts down production and disables critical components of supply chains, gaps turn into problems, production could halt, furloughs and layoffs could occur. There will be huge variability across economies and industries, but taking the U.S. economy as an example, we think it would take quite a prolonged crisis for this to feed through in a significant way. Relative to the demand impact, we see this as secondary.

Geopolitics

While the health challenges and economic consequences are potentially devastating, the political consequences are harder to foresee – but might be the most long-lasting. 

• In Japan, the handling of a COVID-19 outbreak on a cruise liner led to transmission of the virus into the Japanese population and may even result in the cancellation of the Tokyo Olympics. 
• In other countries such as in Iran, a lax response by the country’s healthcare system led to a loss of containment of the epidemic, which is now spreading to the rest of the Middle East.
• The lockdown of towns in Northern Italy is likely too late, with the spread of the virus from Italy already underway across Europe. Voters may not be kind to politicians who fail in their basic duty to protect citizens.

Could COVID-19 put in place its own legacy?

Adoption of new technologies and business models: Crises, including epidemics, can spur the adoption of new technologies and business models. The SARS outbreak of 2003 is often credited with the adoption of online shopping among Chinese consumers, accelerating Alibaba’s rise. As schools have closed in Japan and could plausibly close in the U.S. and other markets, could e-learning and e-delivery of education see a breakthrough? Further, have digital efforts in Wuhan to contain the crisis via smart-phone trackers effectively demonstrated a powerful new public health tool?

Political systems put to test: Political ramifications are not to be ruled out, globally, as the virus puts to the test various political systems’ ability to effectively protect their populations. Brittle institutions could be exposed, and political shifts triggered. Depending on its duration and severity, Covid-19 could even shape the U.S. presidential election. At the multilateral level, the crisis could be read as a call to more cooperation or conversely push the bipolar centers of geopolitical power further apart.

The Way Forward

• Manufactured vaccines that are safe and effective are many months and years away – 2021 and beyond. There is a need for an integrated response, meaning a public health response that includes drugs and therapeutics, not just the development of vaccines.
• As of the end of February, in China the genetic makeup of the virus has not changed, which is a good sign for the chances of creating an effective vaccine that could be available within a year. In the meantime, we must be vigilant and prepared to control the spread. COVID-19 has the potential to spread widely, but it can be at least contained as the current situation in China suggests. In Africa the WHO has helped get 40 labs in 35 countries set up to do testing (from zero before the outbreak) and this will help early detection and early control.

Connecting the Dots:

1. What micro or macroeconomic or legacy will Covid-19 have? What opportunities or challenges will arise?
2. Coronavirus is forcing the retailer to have empty shelves. Discuss the after-effects.
3. In the long term, companies should think about turning crisis management into risk management. Discuss.
4. Imagine you are a company. How will you address the post-crisis world. Can you be part of faster adoption of new technologies, new processes, etc? Can you eventually find advantage in adversity for your company, clients and society?