Economic consequences of COVID-19

12/04/2020

COVID-19 pandemic is both a humanitarian tragedy and an economic challenge. At the time this report is written, there are almost 2 million people infected and more than 140’000 deaths across the world. We are observing that the data is not 100% reliable as the different countries are counting the cases differently. However, we can appreciate important facts at this moment:

  • Asian countries are showing signs of having the situation under control. They were the first in suffering the virus, but currently they have their business opened and are trying to come back to routine.
  • European countries have passed the worst part of the disease and, although still in quarantine, they are preparing to start reopening their economy
  • US same as Europe
  • Developing countries in Latin-America and Africa are still suffering the pandemic, and due to the lack of resources, the consequences can be worse than in Europe or the US.

As a result of the lockdown ordered to face the pandemic, the world has suffered the heaviest decrement of global GDP since 1929. The FMI released its forecast for the GDP in 2020 (figure 1), predicting a 7.5% contraction in the GDP of the eurozone, -5.9% growth in the US and -6.5 in the United Kingdom. However, it also expects an increment between 4 and 5% of their GDP for 2021. Countries has been impacted differently due to the spread of COVID-19 in its region, the government responses to the pandemic and the sectors which powered its economy. As there have been huge differences among the different sectors, oil & gas and airlines sectors have suffered an unprecedented shock in demand. On the other way, there have been industries which have increased its revenues due to the pandemic, as the tech sector due to the increment of use of products such as Netflix or Zoom, retailers as Amazon or Biotech firms racing to find the vaccine.

Due to the restrictions, a lot of business have had to close, millions of workers have lost their jobs, or they are on hold, and it makes diminish the consumption, creating a destructive cycle for the economy.

The common answer from the central banks across the world has been to launch an economic stimulus (QE). However, it boosts the monetary base and potentially creates inflation. In addition to that, it tends to diminish the currency rate against others. In this case, as the responses of all countries have been the same, the currency rates have not changed a lot. At least, in the developed countries. The story is quite different in the developing economies, which have a huge reliance on the dollar and their currencies have been severely affected.

Central banks cannot stay printing money forever, neither the countries can increase its debt more time. The more time the economy will be stopped, the longer we will need to get out of this situation. Economies such as Spain and Italy will suffer a severe slowdown, and probably they will be bailout by Europe.

From my point of view, this crisis is not only going to bring us into a deep recession, but it is also going to change our consumer behaviour. Social distant is going to be present in our lives at least until a vaccine is discovered. Travelling will diminish, and if the oil & gas prices are low, maybe there are less incentives to build renewable energy at least for some years. We can see some geostrategy movement among the biggest countries in the world. And potentially a decrement in the globalisation trend that the world has followed since 70’s.

However, these hypothetical outcomes are opinions. The reality is that we are facing a change of paradigm for the human being. And it is full of new opportunities if we understand the sectors and companies that will be benefited of it.

Annex:

A screenshot of a social media post

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