Key Economic Implications of COVID-1920 Mar 2020
The COVID-19 pandemic is resulting in very real human and social impacts. The likely economic impacts of the outbreak fall into four main categories:
- Direct impact from COVID-19 and associated containment measures
- Knock-on impacts from disruption to supply chains and business linkages
- Contingent impacts stemming from financial market stress
- Redistribution effects from changes in government, business or individual behaviour
- Containment strategies are being widely implemented to delay the spread of the virus. Analysis of previous epidemics suggests that reduced mobility within the population has a greater economic impact than the illness itself – and this is becoming apparent in the current COVID-19 outbreak.
- The direct impact of travel restrictions, quarantining workers or temporary workplace closures is increasing sharply. The leisure, tourism and travel sectors have been immediately impacted, while manufacturing industries are being affected by supply chain disruption. Many retailers already facing difficult trading conditions have seen a sharp reduction in customers.
- All sectors of the economy, and every country, will be affected to some degree. Businesses that were already struggling will now face a battle for survival, with company failures in one area having a knock-on effect in other sectors and regions.
- The emergency rate cuts and other measures announced by central banks across the globe are primarily designed to flood the market with liquidity to avoid any contagion through the financial sector. The aim is to prevent the inevitable downturn spiralling into a significant global recession or even a financial crisis – although the latter is not currently considered likely.
- Governments across the globe are also introducing personal and corporate fiscal policies on a scale not seen since the Financial Crisis of 2007/8, to help businesses and individuals survive the coming months of disruption. At this stage it is impossible to know how economically effective these will be, although they are beneficial in helping support consumer and business sentiment.
- A shift towards “risk off” decision-making is already encouraging flight to secure assets, hitting equity markets and driving down government bond yields – although the markets remain highly volatile. Overall, we now anticipate that the global economy will experience a recession, or very close to it, in 2020. Activity will slow in North America and Europe during Q2 and potentially into Q3. Elevated uncertainty and risk, or inability to access funding, will cause many businesses to delay investment or expansion plans, some of which will be deferred indefinitely if the overall economic outlook deteriorates further. A degree of “bounce back” is likely once the immediate crisis moderates, but any lasting damage to the demand side of the economy will delay the pace and timing of the recovery.