Recession – An effect of Corona by Mitshu Patel

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The novel Corona Virus outbreak has threatened millions of lives of people and adversely impacted governments and public health systems. The rate at which the disease spread across different countries and the severity of the damage it caused to the health of the people confirmed it as a pandemic by the World Health Organization. In order to curb the spread of the virus, governments have taken public health measures, such as social distancing and mandatory wearing of masks in public. Many countries have resorted to lockdown in order to flatten the curve of the people infected. However, these steps prevented millions of people to get out of their homes unnecessarily, severed the flow of exchange of goods and services, ceased almost all economic activities by shutting down businesses, thus hampering almost all cash and cash equivalent liquidity and is in due to deliver a global recession.

Impact of global recession on the world economy.

In the initial stages, when central China was the only affected area by the virus, it was viewed as a substantial threat to that economy. “Now, anywhere you look in the global economy we are seeing a hit to domestic demand on top of those supply chain impacts,” said Innes McFee, managing director of macro and investor services at Oxford Economics in London.
From India to Italy, coronavirus lockdowns have closed businesses preventing them to sell their services: a supply shock. Due to this, workers and entrepreneurs lose income, they demand less, and as a result, more businesses lose income, and so on. Many economists are of the view that impact of the demand shock on GDP may be more than the supply shock. The simultaneous supply and demand shock has snarled global production and logistics networks which were built without sufficient capacity to absorb a jolt of this magnitude. International Monetary Fund (IMF) reports that over 3% of the global economy is expected to shrink which is the steepest slowdown since the Great Depression (1930).

COVID-19 pandemic has a deflationary impact rather than inflationary because of the declining demand for non-essential goods and services. The huge imbalance between demand and supply has been highlighted through the example of oil market. There is much less demand for transport fuels owing to the coronavirus outbreak, 90% of which is made of crude oil. There were extraordinary situations when the prices of crude had become negative, upto the level of -$40 in the forward market in NYMEX crude market.

Other commodities like copper is 18% cheaper than it was in mid- January, zinc’s price is more than 20% lower. The countries who gain revenue by exporting these commodities are largely affected by their price fall. The demand for industrial metals has fallen due to lockdowns in China, USA and Europe. IMF states that China accounts for roughly half of the global demand for industrial metals.

According to IMF there will be decrease in food prices by 2.6 per cent in 2020 due to the supply chain disruptions, border delays, food security concerns in regions affected by Covid-19 and export restrictions. For example the prices of tea, meat, wool and cotton have declined. Moreover, the low price level of crude oil has also put a downward pressure on the prices for palm oil, soy oil, sugar and corn.

The economic crisis caused by Corona is unprecedented. This is because in the previous financial crisis 2008-09, government used to encourage people to go out often and spend money but the scenario here is contrary. The disease itself compels the government to restrain people from mass gathering in order to prevent contagion. As long as human interaction remains a threat, businesses cannot operate normally as it was pre-pandemic. Moreover, what was normal before will no longer be and people thus may be less willing to dine in a crowded restaurant and go to concert halls.

IATA estimates that global air transport industry revenues could fall $252 billion, 44 percent below 2019’s numbers, Based on travel restrictions and an expected global recession.

The decline in oil prices due to the pandemic has affected the price of airline tickets. Prices of airfare dropped by an average of 14% between March 4 and March 7, reports a travel booking website Hopper. The biggest average price drop at 35% in Miami, followed by New York City and Las Vegas which has 29% declines.

“The whole system — the whole aggregate of supply chains has been rocked quite significantly,” Roberto Azevedo, the director-general of the World Trade Organization, said in an interview. “In some respects the picture today looks bleaker than after the 2008-2009 crisis.” The economic impact of the pandemic makes the 2008 global financial crisis look like a mere dry run. The collapse in the global output seen so far seems to exceed longer and the downturn will be far deeper.

Taking a look at the effect on different countries, it is observed that, the United States, (world’s largest economy), is almost certainly in a recession. The disruptions caused due to the coronavirus outbreak have led to millions filing for unemployment benefits. The figures were at 20.5 million in April alone and are expected to rise as the impact of the pandemic on the US labour market worsens. Also Europe and probably significant economies like Canada, Japan, South Korea, Singapore, Brazil, Argentina and Mexico. China (world’s second-largest economy) is expected to grow by only 2 percent this year, according to TS Lombard, the research firm. The World Trade Organization, forecasts that almost all the regions of the world would suffer double-digit declines in trade this year, with North American and Asian exporters hit hardest. A report by United Nations shows the economic output of developed countries will plunge to minus 5 per cent and below, meanwhile, the GDP of the developing countries will contract by 0.7 per cent in 2020.

Impact of global recession on Indian economy

India was alert enough to take steps like social distancing earlier which may benefit its economy to do better than other developing nations. Also, the low dependence on exports may lead to less impact of the decline in world trade on Indian economy. Moreover, the decreasing price of crude oil which is its biggest import confirms that it will not suffer an external shock. In a recent report on trade by United Nations stated that India and China will be the exceptions which will not go into recession due to the pandemic. However, there is no detailed analysis explaining the same. Although the country may not go into recession, the impact on the GDP growth will be significant. Prime Minister Narendra Modi has announced a stimulus package of Rs. 20 lakh crores will generate demand by infusing liquidity into the system and thus perk up the economy.

The developing countries are in extremely dreadful situation. They have observed and experienced investment rush for the exits this year, sending currencies plummeting, forcing people to pay more for imported food and fuel, and threatening governments with insolvency — economic shocks have hit them before the health shocks begin. A rescue package of $2.5 trillion has been called out for these nations by United Nations Conference on Trade and Development. Also, advanced economies and China have put together massive government packages which, according to the G-20, will extend a $5 trillion lifeline to their economies.

The end of the recession which is underway can only be predicted after the resolution of this health crisis; bringing the spread of virus under control. But even after the virus is tamed the world that emerges is likely to be choked with trouble, challenging the recovery. The essential requirements to boost the spending in the recovery phase are clear and effective communication, broad monetary and fiscal stimuli to be coordinated on an international scale for maximum impact. Mass joblessness exacts societal costs. According to the IMF, firms may slowly start hiring more people and expanding their payroll since they might be unclear about the demand for their output. Henceforth, even after the economic activity resumes gradually, it will take much time to normalize the situation, for consumer behaviour changes as a result of continued social distancing and uncertainty about how the pandemic will evolve.

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