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Major uncertainty has prevailed in the global economy with the crisis situation of Coronavirus (COVID-19), which was initially seen as largely based in china but now has become a global crisis. Initially, when the virus was widespread in China, its manufacturing and services sector plunged and China’s exports fell 17.2 percent in January and February, thus it was a widespread slowdown in the economic activity. With the outbreak slowing down in China, possible measures will be taken to recover the fallen economy, amidst the challenges. The major challenge being, that not only China is affected now; what started from China has impacted 187 countries around the globe, currently Italy being the hardest hit. The global impact is yet to be assessed with the rapidly evolving situation. To complement the situation, the Organisation for Economic Co-operation and Development (OECD) predicted that COVID-19 will lower global GDP growth by one-half a percentage point for 2020 (from 2.9 to 2.4 percent). 

It has been clear from the start that Covid-19 affects both sides of the economy, supply and demand. The supply of goods and services is affected because factories and offices are shut and output falls as a result and demand also falls because consumers stay at home and stop spending.  Therefore, it can be concluded that the most detrimental impacts to the economy is from the “Aversion behavior”, which are the actions that people take to avoid catching the virus. 

When analyzing these issues in depth, countries highly dependent on trade, such as Canada, Germany, Italy, Japan, Mexico and South Korea and commodity exporters are projected to be the most negatively affected by the slowdown in the economic activity due to the outbreak,  as the slowdown on trade with China. 

 

 

In most of the affected countries, including Sri Lanka, the government has imposed bans on certain types of activities, such as closing down factories, offices, schools throughout the country, as they take proactive measures to avoid the infection. This would inherently result in a lost wages for workers in cases where there is no paid leave. However, in many companies around the globe, they have encouraged the remote working option, so that the companies can be operated to a certain extent, minimising the damage. Further, people are advised to reduce trips to the market, travel, going out and other social activities, which have affected all sectors of the economy from manufacturing, retail, restaurants education, which is having a devastating impact on these sectors, especially small-medium businesses.  These in turn translate into reduced income both through the supply side (reduced production drives up prices for consumers) and the demand side (reduced demand from consumers hurts business owners and their employees). With everything that is happening around, investors fear the spread of the coronavirus will destroy economic growth. In answering this, central banks in many countries have cut interest rates, which would make borrowing cheaper and encourage spending to boost the economy in the long-run. Moreover, the travel industry took a sizable hit as governments around the world implemented travel restrictions and tourists responded by cancelling trips, as the public was concerned over the spread of the virus and have led to self-quarantines. 

The rapidly evolving nature of the coronavirus has created a number of issues that make it difficult to estimate the full cost to the global economic activity. In order to curb the damage, comprehensive measures have been implemented by economics in response to COVID-19. For instance, in Sri Lanka, the following measures were undertaken on 16th March, 2020. 

“The Central Bank of Sri Lanka cut the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) by 25 basis points to 6.25% and 7.25%, respectively, and the Statutory Reserve Ratio (SRR) on all rupee deposit liabilities of licensed commercial banks was reduced by 1 percentage point to 4%. 

Irrespective steps taken by the government, clearly more measures are needed. As the virus spreads, increased coordinated actions in terms of fiscal, monetary and regulatory policies (according to the IMF) are needed, which will be the key to boosting the global economy.

 

Sources 

https://www.worldometers.info/coronavirus/

https://blogs.imf.org/2020/03/16/policy-action-for-a-healthy-global-economy/ 

http://www.oecd.org/berlin/publikationen/Interim-Economic-Assessment-2-March-2020.pdf

https://www.bbc.com/news/business-51706225

 

Written by Gayara Rajapakshe
Team UniSnap

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