As the coronavirus spreads, tragic human consequences are rapidly unfolding. At the time of writing this article, there is no signs that the spread of the virus is abating; it is rather increasing and taking more lives at an escalating rate. Along with human costs, its effects are penetrating deeper into the global economy. The virus has caused widespread economic disruptions leading to severe contraction in economic activity worldwide. According to the UN trade and development agency UNCTAD, the slowdown in the global economy caused by the coronavirus outbreak is likely to cost US$1.0 trillion in 2020.
UNCTAD further added that the global economy would slow down to under 2 per cent growth which is in line with the Organisation for Economic Cooperation and Development (OECD) which has already slashed its the 2020 global growth rate to 1.5 per cent. Oxford Economics also has cut its global growth forecast for the year to 2.0 per cent. Even before the coronavirus outbreak, S&P Global had predicted 1.9 per cent growth this year. The International Monetary Fund (IMF) is now working on revising the growth figure which is likely to involve a very significant revision of the figure.
However, in the worst case scenario, according to the UNCTAD, where the global economy grew only 0.5 per cent, would involve a US$2 trillion hit to global GDP (gross domestic product). There is now a growing degree of anxiety that goes far beyond the health scare. These concerns are serious and real involving the livelihood of a very large proportion of people on this planet. UNCTAD pointed out that the falling oil prices were also adding to the growing sense of unease and panic.
The coronavirus and the plunging oil prices have created chaos in global financial markets. The market analysts and investors indicate more than 30 per cent fall in the stock market in the US over the last one month, and it is not over yet despite the massive Federal Reserve intervention in the market with trillions of dollars officially ending the 11-year bull market. More disturbing is the US growth and employment outlook. Goldman Sachs just a week ago predicted that US GDP would contract by 3.1 per cent and unemployment would rise to 9.0 per cent this year.
As for the Eurozone, the picture is even far more pessimistic as many Eurozone observers expect a 10 per cent decline its GDP this year. The Eurozone economy had already been performing rather very badly in 2019. The European correspondent of Financial Times wrote last week that the coronavirus-induced effect on the Eurozone would be an economic shock, a corporate solvency crisis and a political crisis all folded into one.
The real economy is now simultaneously impacted by both a supply shock and a demand shock by the spread of coronavirus as reflected in output contraction and declining demand for both goods services resulting from nationwide lockdowns, social distancing and quarantine measures to contain the spread of the virus.
Some economic and business analysts also now fear a much longer recession or even depression to eventuate from the coronavirus spread around the world which has already transformed a health crisis also into a devastating economic crisis. A "V'' type recovery is now can be completely ruled out given that such massive lockdown of economies around the world has never before been experienced. UN Secretary General Antonio Guterres said "A global recession - perhaps of record dimensions - is near certainty''. He cited a report by the International Labour Organisation (ILO) that said workers around the world could lose US$3.4 trillion in income by the end of the year.
To further complicate the situation, the enormous amount of debt that has now piled up around the world, estimated at US$253 trillion (322 per cent of global GDP) could be collapsing as the economic effects of the coronavirus become increasingly more pronounced. Emerging market economies (EMEs), in particular, are more vulnerable now as the US dollar value is on the rise. As most their debt is denominated in US dollars, this is pushing up their debt liabilities in their national currencies. Increasing debt burden is now taking place when these economies are slipping into recession creating a cash flow problem.
Also, the spread of coronavirus has contributed to massive capital outflows from these emerging market economies as investors are seeking safety in the US dollar putting significant stress on foreign exchange markets. In fact, some EMEs are now facing a sudden stop in capital inflows rendering them unable to meet their external financial needs. This outflow of capital also has contributed to further downward pressure on these countries currencies.
The outbreak of the coronavirus will have devastating economic effect on least and developing countries (LDCs). This effect will be mostly felt by countries with close economic links with China either through trade or investment or the both. Also, commodity- exporting LDCs face a different kind of challenge resulting from weaker export earnings resulting from a stronger US dollar as all most all their exports are denominated in the US dollar. At the same time as developed economies slip into recession, that will result in falling commodity prices. That will cause a double squeeze on these countries' export earnings.
Most of these commodity-exporting countries are also heavily indebted countries where much of their debt is also denominated in the US dollar. As investors continue to seek safe haven for their money in the US dollar causing the US dollar to appreciate and that causes national currencies of these LDCs to depreciate. This, in turn, causes interest and principal payments to rise rapidly in local currencies. Overall, commodity-exporting LDCs will face falling export earnings with increased debt liabilities. As for Bangladesh, according to the Asian Development Bank (ADB), in the worst case scenario where the effects of the virus lingers for more than six month, will result in GDP to go down by US$3.021 billion which translates into a decline in GDP by 1.1 per cent.
Furthermore, the current advisory by health agencies in LDCs is that people should stay home. This is a well-intentioned guidance. But such a guidance is of very limited use to people without any income safety net. People living in poverty and employed in the informal sector mostly on a casual basis simply do not have the money to stockpile food to stay at home.
Also, healthcare facilities in LDCs lack any form of universal healthcare provision to respond to the current coronavirus crisis. Hospitals and clinics in most of LDCs lack hand washing stations, proper waste disposal, hygienic equipment, even running water. The question naturally arises how the need for new emergency hospitals and all needed medical aids like test-kits and respiratory machines will be met, And most importantly, who will care for them? The truth of the matter is to effectively deal with the coronavirus pandemic, the healthcare system that is needed to do the job does not exist in these countries.
Countries all over the world, including Bangladesh, are struggling to manage this global health crisis. Since Bangladesh is already struggling to provide basic health care infrastructure in one of the most densely populated countries on earth, this global pandemic will pose a very serious challenge. The current crisis is also the opportunity for LDCs, including Bangladesh, to devise and implement plans for developing an effective healthcare system which will entail technical and financial help from the developed world. International agencies and financial agencies ought to provide grants and concessional loans to these countries to beef up their public health care system.
Overall, now the global economy is faced with a combination of health crisis, economic crisis and a financial crisis rolled into one. And that has created a very serious challenge for central bankers devising their policy options to face the challenge. The policies that have been adopted so far proved to be mostly ineffective to stimulate the faltering economies in the developed world.
Emergency lending programmes will add to the liquidity to make the credit market functioning and tax rebates will help most adversely affected individuals and businesses. These combined together can work as an enabler to stem the tide of collapsing demand to some extent. But lowering interest rates in response to very serious global health crisis will neither stop the spread of the virus infecting working people nor will open the shuttered factories and businesses.
The solution to the current economic crisis primarily lies in the solution to the health crisis. The spread of coronavirus across the world demonstrated that viruses have no national border. This calls for a well-coordinated multilateral approach to deal with such crises. The COVID-19 pandemichas put every country's health care system under severe test. And a very large number of countries have failed the test. The COVID-19 pandemic has exposed serious flaws in the health care system not only in developing countries but also in some of the developed countries. As health care is a public good, so its universal provision should also be public.
Muhammad Mahmood is an independent economic and political analyst.