An In-Depth Analysis of the COVID-19 Outbreak

Induma Selvakumar

The viral disease, COVID-19 has been declared a global pandemic, with cases exponentially growing day by day around the world. The virus was thought to have originated in China; a country which has now proved to be a rivet to the global economy. As the new decade celebrations began to cease there was brewing news of a deadly virus spreading through Wuhan, China a potential epicentre to a soon to be global crisis. However much like most of us stuck at home today, we initially dismissed the severity of this respiratory disease and did not anticipate the effects it has had on our day to day lives. With many of us sitting next to piles of toilet roll and pasta packs we must analyse how this outbreak is affecting our current consumption and our financial stability for the foreseeable future.

Many economists build their models of how the economy will adapt by comparing the circumstances to previous dilemmas; however we have never seen a humanitarian crisis of this scale before. Although there have been comparisons to the 2008 recession- the aspects of life and death pose a much larger threat to the Global Economy.

From an economic perspective, the key issue is not just the number of cases of COVID-19, but the level of disruption to economies from containment measures. China being the largest engine of trade caused great damage to the global supply chain as its labour depleted and its mass production was put on a hold when the country went into lock-down. The availability of cheap labour and the population of 1.4 billion has established it as the most efficient manufacturing engine - thus a large surge of temporary unemployment has caused a global supply shock.

Wuhan are mass producers of IT software and thus technology companies have seen a fall in 15% of production around the world. While several fiscal and monetary measures were announced by the Chinese authorities to support the economy and its people in the time of crisis, the short-term damage is evident. Total retail sales of social consumer goods were down 20.5% comparative to the previous year nominally within just the first two months of 2020. Investment in fixed assets fell due to drops in confidence, as foreign direct investors and China itself were unable to make judgement of how this disease would prevail and affect spending. Investment in infrastructure, manufacturing, and real estate development declined by 30.3%, 31.5%, and 16.3%, respectively. The value of exports was down by nearly 16% while imports dropped by 2.4%.

While a contraction in the first quarter is impending, the magnitude of this loss and the time to get back to normal are only calculated guesses at this stage - with unpredictability as to if the virus will play a role in the future due to the possibility of failed herd immunity and thus re- infection? However, The National Bureau of Statistics of China states that from a comprehensive perspective, “The impact of the viral disease is short-term, external and manageable. At present, the virus spread has been basically curbed, and the outlook for epidemic prevention and control is getting positive. The people’s basic livelihood is strongly ensured, the overall situation of society is stable, and the economic fundamentals for long-term sound economic development and progressing trend remain unchanged.” 

China has been lifted out of a period of panic as the number of cases has started to fall and the lock-down has been lifted, however, with this success we see the world’s largest economies - the UK, Italy, Spain etc. enter the second stage. With Italy at a staggering death rate of 10.9% it has limited the ability to travel and therefore the tourist industry has been decimated. China makes up 15% of tourists worldwide and Chinese tourists also spend 3 times more than an average tourist in foreign countries. This means even in the UK luxury brands such as Burberry will see a large fall in demand. Globally, the airline industry is set to lose $29bn, according to the International Air Transportation Association (IATA) with predictions of bankruptcy by April. This will cause a long lasting effect on the travel industry as contraction in demand may extend beyond the period of bans and lock-downs as people begin to fear travelling.

Oil is the largest global commodity. A reduction in global economic activity has lowered the demand for oil, taking oil prices to multi-year lows. That happened even before a disagreement on production cuts between OPEC and its allies caused the latest plunge in oil prices. Analysts from Singaporean bank DBS said reduced oil demand from the virus outbreak and an expected increase in supply are a “double wammy” for oil markets.

Economists can only predict what will happen to the Global Economy in the near future. Europe, as the world's biggest trading block, could be particularly hard hit by an extended Coronavirus outbreak. 

Our worst-case scenario foresees full containment not being achieved until 2021. The healthcare system will experience capacity shortages, and production in several industries will be disrupted. In the Delayed Cure scenario, supply chains from Asia to Europe, particularly important for pharmaceutical raw materials and electronics, will be in jeopardy and crucial supply chains within Europe will also start to break down. We will see a temporary decline in consumption and investments. 

In the optimistic Fast Recovery scenario, disruptions will only occur in specific sectors, the supply shock will be less strong, domestic production will only be impacted in Italy and demand will fall in just a few industries, such as travel and tourism. 

Government expenditure in the UK will rise on healthcare, education, in public welfare and providing financial support for the self-employed. This could potentially lead to an increase of the budget deficit and national debt, signalling a return to turn austerity in the aftermath of the pandemic.

With its strong focus on the domestic market and orientation towards services, the United States economy is not likely to be as badly affected as other regions. The worst-case scenario foresees a strong impact on NAFTA supply chains and a drop in consumption, with a resulting decline in GDP of 1.2 percent in 2020. Supply chains have been interrupted in selected industries only and fiscal and monetary stimulus is likely to occur, given that this is an election year. In the best-case scenario, the US will see no slowdown in GDP growth, with domestic demand stable and business largely continuing as usual.

Overall, as mentioned before, the main factor that will heighten economic stress is the fall in supply with consistent demand - as well as a lack of confidence in fear of falling GDP and thus recession. 

At this point, as students, we cannot actively go out and help. However the best way to restore the health of the public and our economy is to stay at home and look after ourselves and our families.