The Global Economy During and Post COVID-19: What we are facing and might face in the future

Author: Shiyun Zhu   Translator: Mengmeng Shi

Editor: Guan Wang, Lu Ma, Jason Liu

 

  1. Coronavirus’s impact on the global economy

The global economy has been dramatically affected by the outbreak of COVID-19. China, as the first country hit by the pandemic, experienced an extensive economic contraction for the first time since China’s ‘Reform and Opening-Up’ beginning in 1978 [1]. According to the data released by the National Bureau of Statistics of China on April 17, China’s GDP in the first quarter of 2020 fell by 6.8% compared with the same period last year and close to 460,000 businesses went bankrupt. The declines in industrial production, commodity sales, real estate investment, import & export trade, and the filing of new movies were 1.1%, 19%, 16.1% 6.4% [1], 29% [2], respectively, year-on-year. Meanwhile, JP Morgan estimated that the US GDP would shrink by 40% in the second quarter of 2020. The International Monetary Fund (IMF) predicted that the global economy would have witnessed a 3.3% growth without the pandemic, while the current predication is a 3% contraction in global GDP. This will be the largest decline since the Great Depression in 1929 [2], and this trend is likely to continue until 2021.

The current economic recession is different from previous recessions. Both the Great Depression of the 1930s and the 2008 economic crisis were due to the collapse of partial financial markets (stock market crash in 1929; real estate market crash in 2008) led to the closure of major financial institutions, further triggering panic, and consequently a credit crunch. So far, these causes have not appeared during this acute decline [3]. Instead, the present economic recession was mainly caused by the following two factors:

  • Preventative measures to contain and slow down the pandemic

Almost every country has taken some measures to contain COVID-19: such as lockdowns of cities and towns, closing places with a high traffic of people, and canceling mass gatherings. These measures have greatly impacted various industries such as tourism, leisure, retail, transportation, and logistics. Undoubtedly, prevention inevitably imposes adverse effects on the economy in varying degrees. However, the current recession cannot be solved through temporary economic stimulus measures. The industries mentioned before can recover slowly only after COVID-19 has been contained and people feel safe to go out.

  • Decrease in global supply and demand

Due to the spread of COVID-19, numerous factory shutdowns, flight cancellations, and slowdowns in logistics have led to supply chain disruptions. Hence, the “supply” of various commodities in the market has decreased. At the same time, consumers have lowered shopping frequency due to reduced income, psychological panic, “stay-at-home” orders, and uncertainty of economic conditions; this has led to a decline in ‘demand.’ Therefore, the near-zero interest rates imposed by the Federal Reserve in mid-March to stimulate the stock market did not solve the actual decline in supply and demand [4].

  1. Countries’ responses to the current recession

Facing the economic recession and the rapid increase in the unemployment rate, different countries have recently adopted emergency response policies. Some of these countries provided financial relief to individuals and businesses by issuing cash or loans. In the United States, all taxpayers below a certain income threshold can directly receive an emergency relief fund of $1,200; on April 24, Congress passed a $484 billion economic relief bill to help small and medium-sized enterprises. All households in South Korea, except for the 30% with the highest income, can receive emergency cash payments of up to 1 million KRW. The Canadian Emergency Relief Fund (CERB) provided $500 per week in subsidies for individuals eligible for employment insurance for up to 16 weeks. Germany allocated 350 billion euros (approximately 10% of its GDP) to help troubled companies. Its specific measures include the provision of unlimited loans and the government’s purchase of equity in companies.

Other countries’ governments have implemented wage subsidies. For example, the Danish government provided 75% of corporate employees’ wages, while the New Zealand government offered a one-time subsidy of about 7,000 NZD to full-time employees. Australia, Canada and the United Kingdom have adopted similar policies. In addition, countries also provided individual assistance to self-employed persons or contract workers, mainly by issuing unemployment benefits and providing subsidies.

  1. Post-COVID economy: Will we experience an economic depression?

All of the above economic reliefs are emergency measures taken by the government in response to the acute economic recession caused by COVID-19. This acute situation should end when the pandemic is brought under control. However, the economy will not recover in a flash because of the following:

  • Global pandemic worsening

The global pandemic started in China and then spread to Iran, South Korea and Western European countries such as Italy and Spain. The United States and the UK became epicenters of the pandemic in mid-to-late March. At the end of April, the daily new COVID-19 cases in Europe and the United States started to flatten, but the number of new cases in Russia and India entered the global top ten for the first time. Recently, the situations in South American countries (Brazil, Ecuador, Chili), the Middle East (Saudi Arabia, Qatar), and some Eastern European countries (Belarus) have further deteriorated. In the foreseeable future, most countries in the world will maintain closed borders, which will affect global supply and demand as well as import and export trade.

  • Domestic production will restore, but demand will pick up slowly [6]

China’s economy may offer a glimpse of the future. With China’s domestic coronavirus cases cleared (new cases are imported), production has gradually resumed, and factories as well as stores have reopened. China seems to have overcome the impact on the “supply chain” caused by the lockdown. However, due to people suffering from psychological trauma, bankruptcy and unemployment, domestic demand has recovered slowly. In a survey conducted by a financial company in Beijing, nearly 65% of the respondents plan to restrain their consumption following the outbreak. Meanwhile, China is facing a sudden drop in foreign demand. Hence the supply surplus forced a bunch of stores to cancel orders or even close.

  • Vaccines will not be available anytime soon [7]

Many people hope the coronavirus vaccine will solve the pandemic once and for all. However, reviewing human history, the fastest time to develop vaccines took 4 years (the Mumps vaccine in the 1950s). Although science and technology have developed, it is still too early to estimate accurately that a coronavirus vaccine can be successfully developed within 18 months. Besides, the average production capacity per year for a US vaccine factory is 5 to 10 million doses, which is a far cry from meeting the demand of 320 million people. All countries worldwide face this challenge. Hence, the mass production of vaccines in a short time will be a challenging task as well.

  • Restrictions on reopening economies

The government will choose to reopen social production activities to a limited extent due to the lack of specific drugs and vaccines. Tomas Pueyo, a writer in San Francisco, described the lifting of lockdowns as “The Hammer and the Dance.” The hammer is the lockdown and the dance is the reopening [8]. In order to “dance” well, people must observe a series of rules such as wearing a mask, keeping sit six feet apart from dining companions at a restaurant and maintaining a certain amount of people in the office [7]. Traveling will also be limited: travel between cities will be reduced, and international travelers will be forced to be quarantined for 14 days, etc. [7]. This series of measures is likely to gradually transform an acute economic recession into a chronic one.

On the one hand, the economic recession has become almost inevitable in the next year (or two) due to different COVID-19 situations in different countries, the decline in people’s demand and the restrictions on reopening the economies. There is also the possibility of a second outbreak. When this happens, people may experience great psychological shock and melt down. Will people panic and withdraw all funds from the stock market? Will it be difficult for banks to recover loans because of long-term unemployment? Will the recession further trigger the financial crisis? These are yet to be observed.

On the other hand, assuming that the pandemic is well controlled, the economy will eventually recover slowly after a period of time. Abundant evidence indicates that the economic impact of the Spanish flu in 1918 was short-term [9]. In this case, it is worth observing whether there will be restructing of global industrial supply chains and whether the post-coronavirus world may see an end to globalization. The COVID-19 pandemic has exposed the shortcomings of globalization. For example, globalization made most of the developed economies depend on China for everything from pharmacological inputs to surgical masks. When COVID-19 caused China to shut down and stop production, almost every country lacked protective medical resources. In the future, developed countries may bring back some of their outsourced businesses and strengthen economic localization; supply chains may also become more decentralized, and fixed investment in international enterprises will be reduced [10].

Conclusion

From a long-term perspective, it is just a matter of time for countries to overcome any difficulties. Following World War I & World War II, the economy recovered, and spawned a series of modern social systems, such as pensions, universal health insurance, and government loans. Therefore, it is also our hope that COVID-19 will bring about positive changes in the system while the economy finally recovers to before.

 

Reference:

  1. China’s economy suffers its first contraction in 28 years, shrinking 6.8% in an extraordinary shock’ to the global economy 
  2. ‘How Can I Get Through This?’ The Impact of Coronavirus on China’s Economy Is Only Just Beginning 
  3. The Man with the U.S. Economy (and Trump’s Reëlection Chances) in His Hands
  4. Why This Recession Will Be Different?
  5. Governments’ response to COVID-19
  6. COVID-19 crash: How China’s economy may offer a glimpse of the future
  7. The Next Year (or Two) of the Pandemics
  8. Coronavirus: The Hammer and the Dance
  9. Economic Effects of the 1918 Influenza Pandemic: Implications for a Modern-day Pandemic
  10. The Post-Coronavirus World May Be The End Of Globalization

©Copyright 2020 U.S.-China Health Summit COVID-19 Task Force


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The U.S.- China Health Summit is dedicated to the advancement of global health by promoting the exchange of knowledge, ideas, and experiences of healthcare leaders from the U.S., China, and other countries through high-level strategic dialogues, leadership development programs, and applied research.

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