Covid 19 and the World’s Economy

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The outbreak of coronavirus is primarily a human tragedy that affects hundreds of thousands of people. It also has a growing influence on the global economy.

This post aims to give business leaders a perspective on the current situation and the consequences for their companies. The pandemic is moving rapidly, and there are some of the viewpoints in this article can quickly become out of date. We’ll periodically update it as the outbreak progresses.

There have been more than 160,000 confirmed COVID-19 infections and more than 6,000 deaths from the virus at the time of publication. Specifically the elderly are at risk. The cases have been reported by more than 140 countries and territories; more than 80 have documented local transmission.

Even as the number of potential cases in China is dropping (on some days to less than 20), it is growing exponentially in Italy (increasing around every four days). China’s share of new cases has shrunk from more than 90% a month ago to less than 1% today.

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The fear that results from the events beginning with the deaths in Wuhan continues to spread globally quicker than the virus itself spreads. Rather apart from the imminent health risks, a new economic threat is now looming large globally.

Unless there is timely global cooperation and collaboration, we face the risks of a deep and enduring global recession, irrespective of the health policy and economic policy steps taken by China, the US and other countries.

What would be the global economic effects of COVID-19 if political action is not taken quickly and effectively? Is there any way through some form of systematic model-based economic analysis to figure out?

There might also be a rational fact-based way of looking at the potential economic implications. I have been using the best scientific data from the World Bank, the IMF and other domestic and international sources on the Global Economy to do specifically this exercise in work which is still ongoing.

My preliminary findings apply to the aggregate implications for the global economy, China, the United States, the Middle East and different sectors. More significantly, they also give us rough views into what the crisis might mean for the major regions, unless we immediately take successful global action.

To determine the effect, I extracted several sets of counterfactual results based on a model. My continuing research could be seen as a first step in rigorously examining the consequences of COVID-19. In such scenarios, aggregate effects in terms of production and job losses for the regional, middle-eastern (ME), EU, and US economies are calculated from many models.

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There is both the cost of control and the cost of global chaos with higher and lower limits and a situation in between. Finally, the scenarios of the financial systems are studied using a more detailed model of economic structures with the specific banking and financial sectors.

It’s obvious China’s going to suffer most. But, along with several other smaller economies, Japan, the Middle East, the US, and the EU should do likewise. There is also no cause for China’s rivals to celebrate. With high production costs and uncertainty, China’s GDP would go down by many percentage points.

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The EU will lose about two percentage points, while the US will lose about one-and-a-half percentage points. However, some of the models results already available should give thoughtful pause to ME, US and EU people. The oil-producing economies are already suffering economic downturns as oil prices decline. COVID-19’s internal and external effects will exacerbate the phenomenon.

My current simulation results show, as a first approximation, that easing fiscal policy and introducing expansionary fiscal policies–even if they are implemented immediately and organized globally–would take about six month to phase in and lead to a very low loss scenario, particularly for China.

But the loss would be significantly greater for the EU and the US financial companies than we’ve seen so far. The resulting loss of global jobs in these and other sectors should also trigger pause for all countries.

Although medical and public health practitioners are having trouble understanding the essence of the virus and to formulate antidotes, strong economic steps are needed to protect vulnerable communities internationally and within countries.

A concerted cut in interest rates would most likely occur, but monetary policy alone can not help improve global investment and productivity. Tax cuts will help but take time even if they are strategically crafted to help not only the world’s wealthy, but the middle and low-income groups as well.

Economic policies would be required through direct government spending that is targeted at particular industries and groups.

Trade policies are also relevant, too. If trade barriers increase due to this hysteria which strengthens earlier tensions then all countries will be losers. The hostility against China could well move in that direction. Similarly, some countries may attempt to offset the export loss by devaluating their currencies.

These movements will spread rapidly across the global system, generating a competitive scenario of devaluations where eventually no-one can win.

Remember also the position often played by the trading networks. Clearly, with globalization, these corporate networks around the globe are becoming more relevant than ever. The complexities of network trade will easily break down with a major disturbance in size.

Since networks need time to start up again, these large-scale disturbances could contribute to the global trading system’s long-term failure.

Before it’s too late, world leaders must act quickly and resolutely. We face the risk of a vicious downward spiral in the world economy. Individual countries can act and have indeed acted unilaterally, for instance by lowering interest rates justifying an emergency.

But global alignment of policies on political, economic, trade and exchange rates is desperately required. It is now, if there has ever been a time to formulate globally synchronized policies through collaboration between the US and China(G-2), the G-7, and more generally, the G-20.

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