Around ten weeks have passed since the World Health Organization officially confirmed the existence of a new ARS-CoV-2 virus, causing COVID-19 disease, with the first cases reported in Wuhan, China. The virus spread quickly from the city of Wuhan through the whole of China, causing more than 81000 infected and more than 3000 deaths up to now. However, the majority of the new cases since February 25th were reported outside of China. From something that was considered a China-centric crisis, the problem rapidly escalated to soon become one of the most challenging global health crises in history. Up to today, almost 170000 cases of coronavirus were reported, with around 6500 deaths worldwide.
As it usually happens, the beginning of the problem was taken lightly, which made Europe the new virus hotspot, especially Italy and Spain. Each of these transmissions has sprung up mainly due to the millions of people traveling every day for social and economic reasons, making it difficult to prevent the spread of the disease. This pandemic is first and foremost a state of a health emergency, but apart from that, the economic uncertainty that the virus has sparkled will be an enormous challenge for the world’s economy – it will cost the global economy $1 trillion in 2020, the UN’s trade and development agency, UNCTAD, said last Monday. “We envisage a slowdown in the global economy to under two percent for this year, and that will probably cost in the order of $1 trillion, compared with what people were forecasting back in September,” said Richard Kozul-Wright, Director, Division on Globalization and Development Strategies at UNCTAD.
Source: UNCTAD calculations based on IMF, WEO, October 2019
The spread of COVID-19 has arisen the questions about governments’ abilities to come up with an effective and coordinated response to this crisis. Therefore, one of the questions that we hear most often these days relates to the global economic impact of coronavirus.
What will be the impact of COVID-19 on the economy?
The damage extent will depend on numerous factors, one of the most important ones being how quickly the virus will be contained, how fast and effective will the governments act, and how much financial support governments are able (and willing) to deploy during the pandemics and afterward. As Routers reported, the COVID-19 impact on the Chinese economy is already worse than expected. China’s manufacturing and services sectors noted record lows in February when the crisis peaked. “Stagnating consumption amid the coronavirus epidemic has had a great impact on the service sector,” said Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group. To which extent this is true says the fact that the Caixin/Markit services purchasing managers’ index (PMI) almost halved last month to just 26.5 from 51.8 in January. This is the first drop under the 50-point margin in the last 15 years since the survey began. The virus hit extremely hard the automotive industry as well – China car sales drop record 80%.
After almost 12 weeks the virus spread in China is finally slowing down, however, the situation in Europe and the US is becoming more serious every day. Even before the coronavirus outbreak, Europe was facing some hard times. But, after the coronavirus put the industrial heart of Italy in quarantine, and emptied the streets of Venice, public gatherings and major trade shows were canceled in France, Germany, and Spain, the economists all agreed in one – the economic downturn across the continent is certain.
There are two scenarios that are most likely to happen. The scenario of a global slowdown means the change in people’s behavior. The resulting demand shock is expected to cut global GDP growth for 2020 in half, to between 1 percent and 1.5 percent, and put the global economy into a slowdown, though not the recession. This will mostly affect small and mid-sized companies and less developed economies who would suffer more than the developed ones. Another possible scenario is the recession. Recession is very similar to the global slowdown, but the consequences would affect the third quarter and beyond. A global slowdown will also not affect all sectors equally.
What sectors will be the most affected?
At the sectoral level, it’s obvious that among the most affected ones will be tourism and travel-related industries. The vast majority of countries have closed their borders, or they are at least closed for people coming from the virus’s most affected countries. The European Union’s industry chief estimates €1 billion losses per month in the tourism sector due to the virus’s impact. People all around the world are canceling their holidays and trips, even the ones planned for summer. Therefore, the airline industry is expected to fall for the first time in more than a decade. International Air Transport Association (IATA) the trade body for the global airline industry, expects falling passenger demand to result in $29 billion in lost revenues this year alone. Due to countless canceled flights, insurance companies are also suffering losses.
Another industry branch that is already suffering great losses is restaurants and entertainment. Due to the fact that now the majority of countries are in ‘state of alarm’ restaurants, bars, clubs, cafes, mass entertainment venues, such as concert halls and museums are closed, or their working hours are limited. Also, ever since World War II, there has been no situation that has literally stopped the sports events as COVID-19 has. The NBA season is paused, as well as the Champions League, and even though Japan assures the public that they are doing everything necessary to provide all the needed conditions for the Olympic games, they are still questionable.
Pharmaceutical and Healthcare industry is also in a very delicate position. The demand is indescribably high, but at the same time producing all the necessary products and medicines is very hard due to difficulties in supplying.
Also, whenever there is an economic slowdown going on, it is followed by lower energy demand. The economic downturn puts pressure on global oil prices leading the Organization of Petroleum Exporting Countries (OPEC) to consider further cuts to production through the end of June. Since the discussion between OPEC and a few other major oil producers ended fruitlessly because Russia refused to agree to production cuts, Saudi Arabia cut prices and lifted output, starting that way a sort of Saudi-Russian price war.
COVID-19 and its effect on eCommerce
If there is an industry branch that will benefit from the situation caused by the strain of COVID-19 then that’s definitely eCommerce. Since many countries have put into place measures such as social isolation, and working from home, the eCommerce market is booming. People tend to avoid public and crowded places and to order as many things that they can online. Ecommerce activity, particularly related to health and grocery, nowadays is reaching its peak. For example, in China, vegetable deliveries saw an increase of 215% in online shopping grocery sales in the last ten days of February. Also, many restaurants are offering free delivery, and some interesting ideas have emerged – due to social isolation, some bars are offering free cocktails delivery so that you can have a usual online Saturday night gathering with your friends. There are also many companies providing free use of their services for attending online courses, movies, books, or even video exercises for not skipping the gym.
Since the eCommerce industry is booming, it’s important to track your competition more than ever before. In case you need any help with this task, feel free to check the online price monitoring tool, Price2Spy.
It remains to be seen will these effects on the eCommerce market be long-term ones. For sure, consumer behavior may change – some shoppers may well return to their old habits, but others, having shopped regularly online for their favorite brands for the first time, may continue to do so.
Government responses to economic consequences due to COVID-19 outbreak
National governments have announced pretty much country-specific reactions and measures to the COVID-19. In China, the epicenter of the outbreak, the government announced billions in loans for companies facing liquidity constraints as well as financial support to specific sectors. The Federal Reserve in the USA encouraged financial institutions to “meet the financial needs of customers and members affected by the coronavirus”. Also, the European Central Bank, International Monetary Fund and World Bank respectively, last week announced the availability of $50 billion and $12 billion in the financing, to support low-income market economies.
Although it’s difficult to make some exact predictions of the impact that COVID-19 will have on the global economy, it is clear that it will be important and long-lasting. Everything is affected – all industry branches, economies, financial markets, even working forms and relations. Many companies will face bankruptcy which for sure will put the world in an even more difficult economical state. Therefore, inevitable challenges are ahead of us all. However, providing a well-coordinated state policy will give us all the best chance to overcome and limit as much as possible this sad human and economic times.