How is the Coronavirus affecting the Global Economy?

How is the Coronavirus affecting the Global Economy?
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by Sanjeev Kapoor 17 Mar 2020

During the past weeks, our lives have been severely impacted by the 2019–20 coronavirus pandemic, an ongoing pandemic of coronavirus disease 2019 (COVID-19). The virus was first reported last November in Wuhan, Hubei, China and has recently spread all around the globe. Significant outbreaks have taken place in South Korea, Italy and Iran, while deaths have been reported in tens of countries all over the world, including all European Union countries and the United States of America (USA). Last week, on 11 March 2020, the World Health Organization (WHO) declared the outbreak of the virus a pandemic.

While the pandemic is in progress, it is still difficult to estimate the economic consequences. Projections are continually revised for the worse. Two weeks ago, the COVID-19 cost on the global economy was projected to be nearly 3$ trillion. However, this projection was assuming a slow-down of global growth. During these two weeks, projections have been deteriorating, as there are signs of coming recession in several regions, including the entire Eurozone.  In this volatile landscape, one thing is certain: The world economy is heading to a standstill, which will have adverse effects on the global economy. Most likely, the pandemic will lead to slower growth or even recession in the USA, China, Japan, and the Euro area.  This recession is due to a combination of multiple factors including problems in travels, inefficiencies in the supply chain, reduced consumption and extreme uncertainty. However, the ways it affects the IT industry are rather special and include some positive aspects as well.

 

The Dramatic Effects on the Travel and Tourism Industry

The airline industry was the first to sense the adverse effects of COVID-19. From the very first days of the outbreak in China, Italy, and South Korea, hundreds of flights were canceled, and many people become unwilling to travel for business or leisure purposes. In this context, airlines have been waiving change fees for new bookings, while at the same time offering trips in low prices towards attracting travelers on board. According to the International Air Transportation Association (IATA), airlines will lose many tens of billions of dollars. The monetary estimates of the loss are being revised every day: They will certainly exceed 30 bn dollars. This is the reason why we are also witnessing an accelerated drop in airline stock prices.

In addition to airlines, businesses in the tourism industry are seeing a significant reduction in their expected turn over and revenues. This is a direct result of the fact that travelers had to massively cancel their trips as a result of preventive measures taken by governments in both Europe and the USA. Furthermore, they cannot even plan future trips, as they do not have enough information about whether they will be allowed to travel and when. Among the most affected businesses are hotels, travel agencies, tour operators, as well as freelancing guides.

 

Significantly Reduced Consumption

During the pandemic, consumers are buying fewer things as they worry about the virus and its potential implications on their financial well-being. Specifically, citizens are cutting back purchases of goods to increase their emergency savings. For example, there is significantly less demand for food and beverage, which puts pressure on the respective industries. Moreover, citizens are less willing or even unable to go out to eat. Consumption of luxury and expensive goods (e.g., cars) is also significantly reduced. However, there are some exceptions to the reduced consumption rule: Citizens spend more on protection masks, drugs, antibacterial liquids, and emergency goods (i.e.  goods urgently needed in times of crisis).

Reduced consumption is also expected to affect the workers of severely affected businesses. Specifically, many workers will receive less money than expected, while others will be made redundant. These workers will further contribute to reduced spending and to a worsening of the overall economic activity.

Several big multinational retail companies have already experienced the adverse effects of reduced consumption. For instance, manufacturers of luxury goods that relied on Chinese consumers had to close many of their stores. This has also cascading effect as major exporters will experience significant declines in their expected revenues for 2020.

 

Disruptions in the Supply Chain Management

The pandemic is also causing severe disruptions in the Supply Chain. During the initial phase of COVID-19, many manufacturers and retailers were affected by the reduction of production activities in China. Specifically, they had to face shortages in source materials, components, and finished goods, as their suppliers are Chinese.  The idle plants in China led to many empty production pipelines, along with significant increases in production and supply chain cycle times. At some stage of the pandemic, some manufacturers and retailers had to suspend their operations, because they run out of the key inputs that they need to produce their products.

However, supply chain disruption is not only affected by reduction in production and the throughput of many factories worldwide. It is also disrupted by the surge of demand for specific goods. Spikes of demand in the short-term results in empty shelves in supermarkets and other major retailers. This phenomenon is known as stockpiling. Stockpiling offers some opportunities for large retailers that have effective inventory control strategies and diverse supply bases in place. Such retailers can effectively respond to spikes in demand. On the other hand, smaller businesses are bound to suffer from spikes and variability in consumer demand.

 

Big Uncertainty about the Future

COVID-19 has created extreme uncertainty: The duration of the pandemic in each of the affected countries cannot be credibly estimated. It is however well known that economic growth hates uncertainty. The latter affects the economic plans of businesses, households and of the financial market. For example, businesses are holding off or even canceling investments, as they have no ways to estimate the number of their potential customers and to create credible business plans. Similarly, households can hardly plan their finances and are worried about health risks and their subsequent economic risks. The latter are significant for households that have inadequate health insurance and therefore might have to pay large doctors’ bills in case they get sick.

Recently the Director of the IMF (International Monetary Fund) has characterized the outbreak as “the world’s most pressing uncertainty.” This is also reflected in the valuation of stocks and the tremendous volatility in the financial markets. During the past week, Wall Street witnessed one of the biggest crashes in its history, which compares to the 1929 and 2008 crises, but also to the notorious “Black Monday” of 1987 i.e. second-largest one-day percentage drop in stock market history.

 

Impact on IT Industry and Activities: Identifying Winners and Growth Opportunities

Digital activities could potentially be among the survivors of the COVID-19 crises. For example, digital marketing activities like social media marketing, affiliate marketing, and digital content creators are among the least affected. Some other digital services like Netflix can be also considered among the winners of this crisis, given that people stay at home, which is likely to increase Netflix usage and subscriptions. There will be also growth opportunities for some IT companies. For instance, vendors of teleconferencing software will increase the sales of relevant licenses, as companies are massively undertaking teleworking. As another example, IT outsourcing companies are likely to increase their market share and revenues, as they could undertake tasks that can be hardly carried out in regions severely affected by COVID-19. Specifically, EU enterprise will be offered with compelling options for outsourcing tasks to firms in regions that are less affected by the virus.

 

The depth of COVID-19 economic impact remains to be seen. However, we already know that it will have severe consequences in the global economy, leading to one of the biggest economic crises of all times. Businesses and citizens need to monitor closely developments around COVID-19, hoping that sooner or later the global economy will get back to normal. The IT sector could provide some growth opportunities in the COVID-19 era. This is, for example, the case with IT outsourcing companies and vendors of teleconferencing software. Whether these opportunities will however materialize remains to be seen.

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