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Tuesday, June 02, 2020

Explained: How Covid-19 has affected the global economy

Covid-19 impact: According to IMF, the global economy is expected to shrink by over 3 per cent in 2020 – the steepest slowdown since the Great Depression of the 1930s. 

By: Explained Desk | New Delhi | Updated: May 16, 2020 3:05:09 pm
coronavirus, coronavirus news, coronavirus impact on economy, recession coronavirus, how will coronavirus hit economy, US recession coronavirus, job loss coronavirus, indian express, express explained Migrant workers try to catch a packet of biscuits given by locals in Lucknow, Thursday. (Express Photo: Vishal Srivastav)

Amid the coronavirus pandemic, several countries across the world resorted to lockdowns to “flatten the curve” of the infection. These lockdowns meant confining millions of citizens to their homes, shutting down businesses and ceasing almost all economic activity. According to the International Monetary Fund (IMF), the global economy is expected to shrink by over 3 per cent in 2020 – the steepest slowdown since the Great Depression of the 1930s.

Now, as some countries lift restrictions and gradually restart their economies, here’s a look at how the pandemic has affected them and how they have coped.

How hard has the economy been hit?

The pandemic has pushed the global economy into a recession, which means the economy starts shrinking and growth stops.

In the US, Covid-19-related disruptions have led to millions filing for unemployment benefits. In April alone, the figures were at 20.5 million, and are expected to rise as the impact of the pandemic on the US labour market worsens. As per a Reuters report, since March 21, more than 36 million have filed for unemployment benefits, which is almost a quarter of the working-age population.

Further, an early analysis by IMF reveals that the manufacturing output in many countries has gone done, which reflects a fall in external demand and growing expectations of a fall in domestic demand.

Coronavirus (COVID-19) and global growth

The IMF’s estimate of the global economy growing at -3 per cent in 2020 is an outcome “far worse” than the 2009 global financial crises. Economies such as the US, Japan, the UK, Germany, France, Italy and Spain are expected to contract this year by 5.9, 5.2, 6.5, 7, 7.2, 9.1 and 8 per cent respectively.

Advanced economies have been hit harder, and together they are expected to grow by -6 per cent in 2020. Emerging markets and developing economies are expected to contract by -1 per cent. If China is excluded from this pool of countries, the growth rate for 2020 is expected to be -2.2 per cent.

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China’s GDP dropped by 36.6 per cent in the first quarter of 2020, while South Korea’s output fell by 5.5 per cent, since the country didn’t impose a lockdown but followed a strategy of aggressive testing, contact tracing and quarantining.

In Europe, the GDPs of France, Spain and Italy fell by 21.3, 19.2 and 17.5 per cent respectively.

Oil and natural gas

Due to the fall in travel, global industrial activity has been affected. Oil prices fell further in March as the transportation section, which accounts for 60 per cent of the oil demand, was hit due to several countries imposing lockdowns.

Not only oil, early this year in China, due to Covid-19-related containment measures, the demand for natural gas fell, as a result of which many Chinese LNG buyers halted their imports as storage tanks filled.

Industrial Metals

Due to lockdowns in China, followed by in the US and Europe, the demand for industrial metals reduced as factories shut down. As per IMF, China accounts for roughly half of the global demand for industrial metals.

Food and beverages

IMF projects a decrease in food prices by 2.6 per cent in 2020, caused by supply chain disruptions, border delays, food security concerns in regions affected by Covid-19 and export restrictions.

In the lockdown period, while the price of cereals, oranges, seafood and arabica coffee has increased, prices of tea, meat, wool and cotton have declined. Further, the decline in oil prices has put a downward pressure on the prices for palm oil, soy oil, sugar and corn.

How have countries coped?

According to an assessment by the World Economic Forum (WEF), supporting SMEs and larger businesses is crucial for maintaining employment and financial stability.

In India, Finance Minister Nirmala Sitharaman has announced some details of the Atmanirbhar Bharat Abhiyan package, to provide relief to Medium, Small and Micro Enterprises (MSMEs) in the form of an increase in credit guarantees.

Many advanced economies in the world have rolled out support packages. While India’s economic stimulus package is 10 per cent of its GDP, Japan’s is 21.1 per cent, followed by the US (13 per cent), Sweden (12 per cent), Germany (10.7 per cent), France (9.3 per cent), Spain (7.3 per cent) and Italy (5.7 per cent).

However, the WEF notes, “…there is concern that the size of packages may prove insufficient for the duration of the crisis; that disbursement may be slower than is needed; that not all firms in need would be targeted; and that such programmes may be overly reliant on debt financing.”

In Asia, countries including India, China, Indonesia, Japan, Singapore and South Korea account for about 85 per cent of all the Covid-19 cases on the continent.

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South Korea stands out, since business and economic activities were not completely stopped and therefore, their economy was not severely affected.

China recently lifted its lockdown and has since then been gradually reopening its economy without an aggressive second wave of infections so far.

Further, even as economic activity resumes gradually, the situation will take time to normalise, as consumer behaviours change as a result of continued social distancing and uncertainty about how the pandemic will evolve.

For instance, in its World Economic Outlook report for 2020, the IMF mentions that firms may start hiring more people and expanding their payroll only slowly, as they may not be clear about the demand for their output.

Therefore, along with clear and effective communication, broad monetary and fiscal stimuli will be required to be coordinated on an international scale for maximum impact, and, “would be most effective to boost spending in the recovery phase.”

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