• Yash Jaiswal

How has COVID-19 affected the world economy?

Updated: Oct 25, 2020

While there is no way to accurately estimate the economic damage from the novel coronavirus, there is widespread consensus among economists that there will be adverse impacts on the global economy. The estimates have so far indicated that the pandemic could pare global economic activity by 3.0% to 6.0% in 2020, with partial recovery expected in 2021. Overall, expectations continue to suggest growing uncertainty and caution with significant downside risk.

The June 2020 Global Economic Prospects has shown both the current and near-term outlook for the impact of the pandemic and the damage done to the long-term prospects for growth. The report presents a baseline forecast anticipating a 5.2% contraction in global GDP in 2020, raising the risks of global economic recession with low levels of productivity and unemployment not encountered since the Great Depression. This is despite the extraordinary efforts put forth by governments and central banks to curb the downturn with monetary and fiscal measures.

The spread has left corporations and businesses around the world calculating costs, estimating losses and predicting recovery. The stock markets also saw dramatic falls and turbulent times. Dow Jones Industrial Average reported its single largest fall of almost 3000 points on March 16, 2020. FTSE and Nikkei saw their biggest quarterly drops of 2020, unobserved since 1987.

The pandemic has resulted in economic damages largely driven by an acute fall in demand for goods and services by consumers. This dynamic is clearly depicted in the industries such as travel and tourism. To reduce the spread of the virus, nations have put in restrictions on travel thus hindering growth in the aviation industry. The loss of planned revenue has led to reduced number of flight operations and cost cuts in the form of staff layoffs. This dynamic is applicable to other industries as well. Falling demand for oil and new automobiles leads to cutting staff to account for lost revenue, which could eventually cause a downward economic spiral. Using retail as an example, unemployed retail staff can no longer afford to continue with the same level of consumption which compounds the reduction in sales occurring through the closure of shops, cascading the crisis over to the online retail sector. Economists are contemplating whether the pandemic has the possibility of leading to a global recession on the same scale as the Great Depression.

Emerging economies and developing markets will be battered by economic headwinds in multiple quarters: loss of tourism and trade, declining remittances, pressure on poor healthcare system, reduced capital flow, stricter financial conditions amid mounting debt. Trade restrictions and disruption of supply chains could impact the import and export of agricultural products between trading partners, raising food security issues.

The COVID-19 pandemic has created a global economic crisis where the most advanced country’s central banks have their base rates close to zero. Conventional monetary policies have become redundant since there’s little room for market interest rate cuts to spur demand and investment cycle, quantitative easing has had little success in reviving the economy, especially in the United States. The central banks in major economies are now attempting to increase economic growth by using unconventional monetary policy tools like negative interest rates, extended liquidity operations, asset purchase programmes (quantitative easing) and forward guidance, thus departing from their established policy frameworks.

Central banks understood the limitations of what could be achieved using only conventional monetary policy tools, since there were insufficient improvements in the financial health of the economy. The conventional policy easing would eventually run into the constraints of the “effective lower bound”. Unconventional monetary policy has become more prominent in helping influence liquidity and credit spreads (including interest rates on various risk-free instruments), along with term spreads (like long-term risk-free rates). They are used with the aim of restoring asset valuations and liquidity conditions in the financial market, thus supporting the monetary policy transmission mechanism.

With ever-increasing unemployment, declining growth and tepid investment activity in most economies, central banks are trying to maximise use of monetary policy tools to curb the impact of COVID-19. Large-scale government spending along with increased public investment projects would help in complementing rate cuts. Policies to sustain both short and long term objectives depend on strengthening the healthcare sector and placing targeted stimulus measures to help rekindle growth, including support for the private sector and monetary support to households. Countries should focus on sustaining economic activity with measures to assist firms, essential services and households.

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