The world’s populations are witnessing their sleepless night due to the infection caused by Novel (New) Coronavirus transmitted wide across the world from the central Chinese city of Wuhan at Hubei Province, later named COVID-19 by the World Health Organization (WHO) and declared as pandemic, claimed more than 1 lakh lives and infected around 18 lakhs people as of now all over the world. This deadly virus is transmitted from one to another human body at such a speed so that to break its chain the world is forced to lock down within a couple of months from the date of its identification, gradually pushing the world economy into an unprecedented crisis.
Today, the economic outlook for the world is bleak with the pandemic COVID-19 crisis already causing one of the most sever shocks to global growth in a century and projected second quarter of 2020 will be the worst quarter in the this generation. Till now it has severely affected on the develop nations such as China, Italy, German, Spain, USA and so on. Their economy is totally devasted. Here it’s worthy to mention the situation of gulf countries who basically depend on export of crude oil and import of foods. Their export is fallen like anything thrown from the window. Once the COVID-19 crises is immunised health crises will transform into food crisis at least in this region.
The news reports are painting a dismal picture of the number of supply chain that are affected. It’s evident that the global economy is grinding to a halt. No one knows how exactly it will affect the economy but here is our best stab at a guide to the unknown ways that society will change all over the world.
The investors fear that the COVID-19 will turn down the global economy into depression and government action may not be enough to stop this decline. In response the global share market has changed to bearish movement and accelerating it. The big bearish movement in the share market, where shares of companies are bought and sold, has drastically reduced the net worth of the investors. The FTSE, Dow Jones, Nifty etc have shown huge decline since the outbreak began on 31st December 2019. The FTSE & Dow Jones have shown their biggest one-day decline since 1987.
When crisis hits, investors often choose low risky investments. Traditionally gold is considered as ‘safe heaven’ for investment in terms of uncertainty. In March even price of gold is tumbled and investors become more fearful about the global depression. Likewise, oil price is slumped not seen since 2001, which is expected to fall further.
In order to stop the spread of COVID-19 outbreaks, countries and world capital have been put under strict lock down, people are not moving out of their home, bringing a total halt to major industrial production chain. Industrial production level all over the world is slowed down. Purchasing power of the consumer is declining, so demand for the product is decreasing.
Unemployment is sky rocketing. In the United States alone the number of people filling for unemployment hit a record high signalling an end to a decade of expansion for one of the world’s largest economy.
The effects of lock downs are visible. The travel industry has been severely affected. The movement of people is stopped, tourists are cancelling their holidays and business trips.
The policymakers in the global capitals are busy in making their strategic plan to change the direction of global growth curve from downwards to upwards. This time it’s really hard than in 2008 financial crises. What is really different is that financial shock is an attack on the demand side of the economy, but COVID-19 shocks on supply as well, it is an health shock. While in financial crises, economy simply needs to be simulated for demand to rise, this time it isn’t as simple. In order to address the health shock, we have to held back the economy, complete lockdown for social distancing. Now every country’s main goal is to flatten the curve in terms of health and then real challenge lies on getting the economy on the track.
In response to get the economy on the track the Apex Banks of various countries are cutting down their repo rate and reverse repo rate. This slashing repo rate makes borrowing cheaper and encourages spending to boost the economy. This will help to push the more liquidity into the market and ease repayment issue to sector that has been disrupted by supply chains being broken down. The Reserve Bank of India has cut the repo rate by 75 bps to 4.4% and reverse repo rate stands 4%, down by 90 bps. The Federal Reserve Bank of United States has cut its rate at zero and has launched massive $700 billion quantitative easing programme to arrest the slow economic growth.
The global economy could shrink by up to 1% in 2020, which is around the size of Japan’s economy, a reversal from the previous forecast 2.5% growth, the UN has said, warning that it may contract even further if restrictions on the economic activities are extended without adequate fiscal responses.
CMA Ashraful Alom
Practicing Cost Accountants from Guwahati.