Challenges To The World Economy In 2020
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Despite significant medical progress over the last centuries, infectious diseases are still a considerable threat to society. While some are endemic to certain geographical regions, others spread over large regions becoming pandemic. While the most crucial aspect of any pandemic is, and will always remain, the loss of human life but at the same time, the spread of the virus will also have major repercussions on global economies. Today amid the coronavirus pandemic, several countries have resorted to lockdown, to flatten the curve of infection, which means confining millions of citizens to homes, shutting down businesses, and ceasing almost all economic activities. This situation appears headed for uncharted troubled territory. According to the World Economic Outlook for 2020 published by the International Monetary Fund, the global economy is projected to contract sharply by -3% in 2020, much worse than the 2008 financial crises.
When SARS hit China seventeen years ago, the country was not considered as the top engine of global economic growth. But today, China, the first country to get engulfed in the Covid-19 pandemic, is the world’s second-largest economy and leading trading nation. Similarly, Covid-19 is a demand cum supply shock to the US economy as well. Hence economic challenges created by the pandemic will be substantially larger than SARS.
According to the UN, the lockdown has hit the service sector, particularly industries that involve physical interaction such as retail trade, recreation, hospitality, transportation services. Such industries account for more than one-quarter of all jobs in economies such as Europe and North America. Even the global oil demand has been hit hard by the coronavirus which has resulted in a fall in oil prices as the transportation section accounts for 60% of oil demand. This has led to the shutting down of several oil companies in the Gulf countries.
Due to lockdown in China followed by the US and Europe, the demand for industrial metals reduced as factories shut down. As result industries such as aluminum, steel, etc. are not able to earn revenue and hence taking loans from banks or selling off their lands to pay the salaries.
Like SARS, the pandemic has affected the demand side by changing consumption patterns. As the financial conditions contract, the household saving rates move up, and consumption fall. Even if the condition goes up in the future, people will refrain from traveling or going to hotels and shopping malls. Hence a large scale spread of the virus and fear-induced behavioral changes in consumers, travelers, and businesses may result in a long time particularly for the aviation and tourism sector to revive.
Another major challenge is on the supply side. Difficulty in trade and travel has interrupted the flow of goods and services with cascading effects on industries where supply chains depend on supplies in those affected countries. For instance, China provides 70% of the active pharmaceutical ingredients for making drugs in India, which is the world’s leading manufacturer of generic drugs. Many of the drugs India produces cannot be made without these key ingredients. Besides this, India is also witnessing a major impact on imports and exports in various industries like electronics, mobiles, auto parts, etc.
Last but not least the most important challenge lies in providing jobs to migrant laborers. Due to the shutting down of industries, millions of workers are facing the bleak prospect of losing their jobs and hence returning to their home states or countries. This is not only affecting the country in terms of bilateral trade, investment, remittance but also creating a problem of resettlement and re-employment.
The speed and strength of economic revival depend on how long the pandemic lasts and how much damage it does to the economy but despite overall negative dynamics, in 2003, the end of SARS epidemic was followed by robust and rapid economic growth in Asia, particularly, China. Similarly, coronavirus crisis is not a permanent one. According to the World Economic Forum, supporting SMEs and large businesses is crucial for maintaining employment and financial stability. Hence many advanced countries have rolled out support packages, for instance, Atmanirbhar Bharat Abhiyan package announced by India to support MSMEs. Similarly, some countries have created the concept of the travel bubble to boost the economy.
Vasudhaiva Kutumbakam is a philosophy which means that the whole world is one family. Today it turns out to be truer than ever before. It shows how deeply each one of us is connected with everybody else. A highly connected global economy not only facilitates the spread of the virus but also exacerbates the negative economic growth. Similarly, clear and effective communication, cooperation, broad monetary and fiscal stimuli on an international scale will be most effective in boosting the economy towards recovery phase.
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