Coronavirus disease (COVID-19) is an infectious disease caused by a virus. The virus is highly contagious and is transmitted from one person to another when one comes into contact with the virus. The virus can stay on various surfaces such as metal surfaces, skin, clothes and other surfaces. Some of the symptoms of this virus include coughing, sneezing, difficulty in breathing, high fever, running nose among others. Older people and people with respiratory medical difficulties are at a higher risk of contracting the disease. The disease can be prevented by observing hygiene, taking a lot of hot drinks as it is resistant to high temperatures.
Following the high rates at which the disease spreads most affected countries have ordered a total lockdown meaning no flights are allowed in or out the country. The lockdown has impacted the economy in that most flights have been cancelled into most countries. This affects most airlines and cancellation of booked flights has led to losses to most airlines globally.
Customers buying less. Most governments have ordered their citizens to stay at home to try and mitigate the spread of the virus. This has impacted most businesses such as restaurants and hotels. The impact is devastating as most of these hotels and restaurants have been closed down. The bookings that had been made by customers have also been cancelled seeing as they are not travelling as well. As most people feel increasingly uneasy due to the spread of the virus, they will cut back on their daily expenses and focus on saving more in fear of what will happen to them in future to increase their emergency savings.
Again, when firms are forced to close down, workers will receive less money than they are used to receiving and others will receive no pay. This means that they have less to spend and will therefore cut down on their expenditure lowering the demand of goods and services in the markets. A fall in demand that follows a supply shock constitutes a one-two punch that will further contract economic activity.
Factories in China have slowed down. China constitutes a third of manufacturing industries globally. Due to the coronavirus, most factories have been closed down. This means that the manufacturing and production slowed down. China is also the world’s largest exporter. Car sales have also dropped drastically. Recently most car sales are being done online as people are scared of going to the showrooms to purchase the cars.
Coronavirus has affected the investment plans of most investors. Global economy is expected to undergo a recession after the coronavirus pandemic. This has scared most investors as they are scared of investing in investments that are expensive as they fear losing their money. This has lowered the cost of otherwise expensive investments. For example, the cost of gold has dropped as people are going for a safer ‘haven’ of investment. The price of oil has also been affected and has also plummeted.
Economy growth could stagnate. Economic growth is measured by calculating he percentage change in the gross domestic product or value of goods and services produced over a period of usually one year. If the economy is growing it means that there is more wealth and more new jobs being created. However, with coronavirus pandemic, most businesses have been closed and recovery after the pandemic will take time. This means that most people will be laid off as businesses will not be able to afford all of them. The economy growth will therefore be slow or even stagnate.
Coronavirus has caused supply chain disruptions. Supplies have been cut down as China has closed down its manufacturing factories in affected parts of China. Also, Italy has closed down production firms such as those that manufacture electronics. These supply disruptions mean that other firms that rely on these manufacturing factories for their own production will not get the supplies and will therefore be unable to make their production as well. Products will not reach the customers due to these supply chain disruptions. Supply is a chain and the breaking of this chain at any point ultimately affects the rest of the chain. The result is reduced economic growth and activity.
Uncertainty over the virus and its impact on the economy could further cripple the economy. An economy only works where the risks are known and can therefore be mitigated. Uncertain and unknown risks pose a much bigger threat to the economy and have a larger paralyzing effect on the economy. Coronavirus is surrounded by a lot of uncertainties such as mortality rates, risk of incidence, contagion rate, scale of virus and more.
Uncertainty affects the economy by affecting businesses, households and financial market participants. Businesses may hold off on investments as they do not know what will happen to their supply chains, what will happen to their international customers. It is not known how far the virus has spread or how far it is going to spread. Because of these unknown effects, businesses will not know whether to proceed with their plans or whether to make new investments or not.
Interest rates and stock price decline due to high levels of uncertainty. Shorter term interest rates have become higher than the longer-term rates contrary to what happens in a normal economy. This is evidence of a pending recession in the global economy. Lower long term interest rates mean that financial markets expect the central banks to cut interest rates which are already low, to reduce the risk of recession. However even the effort of these central banks to try and reduce the risk of the recession will not be enough to prevent the pending recession in the global economy.
Coronavirus poses a risk of recession to the global economy. The vulnerability of major economies including the U.S economy has risen as the economy is not growing and these economies are unable to absorb any more strains to the economy. Resulting recessions are of three categories including:
This is a capex boom cycle that turns to bust and derails the expansion. However, severe exogenous shocks such as wars, disasters, or in this case, coronavirus, can push the economy into a contraction.
This occurs when central banks leave policy rates too high relative to the economy’s neutral rate. Due to the coronavirus central banks have lowered the interest rates despite the fact that the rates were already too low.
Financial imbalances tend to build up over long periods of time before finally rapidly unwinding causing disruptions to the financial markets and then the real economy. Coronavirus could cause financial imbalances as a result of cashflow strains arising from disruptions in the supply chain as well as the overall markets.
After the hit of the coronavirus pandemic the global economy could also change in a number of significant ways such as;
The coronavirus could lead to the adoption of new technologies and business models. An example could be the adoption of e-learning following the closure of a lot of schools. Further if the digital tracking employed in Wuhan, China experiences a breakthrough, then that could be a very useful tool in the health sector.
In conclusion, a recession in the global economy will be a major outcome from the coronavirus pandemic. At this point the outcome is unavoidable and we could brace ourselves to deal with the coming recession. Making major financial decisions as well as business investment decisions need to be postponed due to the uncertainty surrounding the coronavirus. The coronavirus could also lead to major technological breakthroughs which will be a boost to the global economy as well.
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