The world has been far from perfect in recent times; a slump in global demand, rise in international terrorism, emergence of new trade wars among leading economies and disagreements over climate change are only some of the issues that the world is struggling with. People all around the world would wake up, discuss these issues over their morning cup of tea, and then go about their lives as usual, not giving much thought to these issues as long as they did not disrupt their routine. No one, not even the giants on Wall Street or the intellectuals at the UN, could predict the emergence of something that would take people’s minds off of everything else, and bring the world to a standstill.
Amid the celebrations of Christmas and New Year, health authorities in Wuhan, China confirmed that they were treating numerous cases of a pneumonia-like disease triggered by an unknown virus, but there was not much evidence to believe that this was something alarming. Indeed, it was not until mid-January, when the reports of the first death caused due to this virus surfaced, that health authorities all over the world started to take notice of this virus. In fact, the Chinese government initially tried to hush this matter up, and took measures to make sure certain whistleblowers were kept quiet, but the spread of the virus and evidences of its fatal impact forced the government to come clean about it.
Believed to have originated from a ‘wet market’ in Wuhan which sells both dead and live animals, fish and birds, the coronavirus is a family of viruses that cause disease in animals. In markets such as the one in Wuhan, the virus very likely made the jump to infect humans because hygiene standards are difficult to maintain when game is kept densely packed and butchered in the open.
Within a short span of a few weeks, the number of infected persons in China grew to over 80,000 and the death toll mounted to over 3%, depicting an approximate fatality rate of 2%. Wuhan was obviously the worst hit, and consequently, the city was shut down, and the residents advised to stay indoors and not venture out. As the wrath of the virus spread beyond the central province of Hubei, so did the shutdown, with major industrial cities like Hangzhou and Zhengzhou putting a stop to all its production activities. The Chinese government imposed various restrictions on international travel as well, but it came a little too late; neighbouring nations of South Korea and Japan also registered cases of the infection, and till date the novel coronavirus has registered over 96,000 cases worldwide over 84 countries, not just those neighbouring China but also far-off places like Italy, Iran and the USA. The WHO has declared the spread of COVID-19 as a ‘global health emergency’, and many countries have called it a pandemic.
The impact of this outbreak is evident not only in the rising number of fatalities but also in the falling stock market indices and other economic indicators of many countries. This adverse effect on economic growth is inevitable, considering the fact that much of international travel have been banned, production activities have been shut down, and in many places offices, factories and schools have been closed indefinitely. All manufacturing and production activities are at a standstill, which is sure to affect supply chain management all over the world. Consumer demand patterns are likely to change too, amid the fear of coronavirus. In fact, the Chinese economy is already facing a contraction in GDP growth, which will last for at least 2 quarters. With almost 50% of the workforce idled, and supply chain disrupted, China is in for a hard time, and there is a strong possibility that their plight may be replicated for their trading partners as well.
The restrictions on international travel and city shutdown have extended to Europe and further west, which will obviously have a dampening effect on production worldwide. The feeling of uncertainty that the fear of the virus has caused among people is manifested in the fact that stock markets in the US (and in other nations) have faced its worst days in February since the start of the 2008 recession. The DOW Jones Industrial Average suffered its single biggest one-day drop in history, falling 1191 points on 27th February. Both Sensex and NIFTY have fallen by over 7% since the beginning of this year, and countries reassessing their economic forecasts is not reassuring for the already uncertain investors.
Recent trends of the inverted yield curve and slump in global demand had led experts to believe that another recession was impending in 2020; what experts did not anticipate was the virus that is likely to be much more grave for the global economy than any other economic indicator. At the initial outbreak, some disruption to economic activity had been expected; but since the coronavirus has risen to the status of a pandemic, its effect on global health and economy had clearly been underestimated. Travel bans have put airline companies into losses, factory lockdowns have made all companies (even giants like Apple and Microsoft) pessimistic about their profits, the need to stay indoors has kept people away from shops and restaurants. Japan, Italy, China and UK, among others, have already seen their growth rates faltering, thus making it impossible for other countries to expect normal growth. What is yet unknown is the extent to which the virus can further cripple economies, and how much time it will take for us to return to normalcy.
The World Bank has promised monetary aid to countries afflicted with the outbreak, the Federal Reserve cut interest rates by half a percentage point, the first emergency cut after the collapse of Lehman Brothers in 2008. All governments are planning interest rate cuts, tax rate cuts, basically any measure which might limit the economic and financial fallout from the outbreak. However, in this scenario, traditional monetary policy is unlikely to go a long way in salvaging the crisis. When people are shut up inside their houses, not travelling, staying in hotels, shopping or dining out, cheap credit and greater money supply will not change their behaviour. What governments should do is focus credit availability towards companies that are likely to face losses, or default on their existing loans due to supply chain disruptions and depressed demand trends.