In an extraordinary effort to slow the spread of the coronavirus, Italy has shut down the entire country. This difficult decision amounts to sacrificing short-term economic gain for the country’s long-term health — and enduring economic recovery.
Across the globe, countries and companies are worried that the global pandemic will cause more disruptions, shrink demand and cause a global recession. They are right to worry.
In February, China’s manufacturing and service sector activities declined dramatically due to the pandemic. The manufacturing outputs fell by two percent, a level reminiscent of the 2008 global financial crisis. The service sector saw a steeper decline. The disruption has lowered production and created shocks to supply. China is not only the world’s factory; it’s also the world’s biggest producer of manufactured components. Closed Chinese factories means having difficulty finding components to make everything from iPhones to cars. So far, the supply chains have been holding thanks to saved supplies. However, April and May could see major breakdowns in the production. The shipping index shows a sharp drop in vessel leasing rates since the start of the COVID-19 outbreak, significantly below the average level of the past two decades. OECD estimates that the global GDP could shrink by 0.5 percent in 2020. If the virus spreads through Asia-Pacific and the northern hemisphere, as it is happening now, it could shrink by 1.5 percent.
Disruption to supply is extremely serious. Lockdowns, unwell workers and school closings (which means parents have to take care of the children at home) all lead to a plunge in a country’s manufacturing and production capabilities. But it is not the only issue. There are shocks to the demand side as well. The 2008 financial crisis showed us what can happen when reduced income and uncertainty make people spend less and result in shrinking demand. Sales decline. So does production. To save costs, businesses spend less. Workers lose jobs. Recessions follow. Every time a big event is canceled or travel restrictions are implemented, the economy slows down.
Central banks are frantically responding with their choice of weapon: cutting interest rates. Governments are expanding public spending in the hope of reviving demand. However, these policies address only shocks to demand, not the bigger shocks — today, they are supply shocks. So we need sequencing of policies to tackle supply shocks first and demand shocks second.
The coronavirus is a global pandemic. It has the potential to prompt financial ministers to coordinate fiscal policies, so that they can tackle both shocks at the same time. Demand and supply shocks are synchronized across countries now. Global trade, as well as economic, financial linkages amplify their negative effects, diminishing economic activity and driving down commodity prices. This week, oil prices crashed 30 percent.
The pandemic will affect all aspects of the global food systems and reveal their weaknesses. In the immediate aftermath of government-imposed quarantines, food prices in China soared. Elsewhere, food prices slipped as the spread of the virus dampened demand for food products. Going forward, food production could shrink. Restriction on transport and quarantine measures could impede farmers’ access to markets, lowering production capacity. The Ebola outbreak in 2014 disrupted the agricultural market chains in West Africa. Many farmers were unable to grow or sell their crops because of measures to contain the virus, including quarantines and travel restrictions. Such measures could hurt agricultural production this time, too. East African countries are already consumed battling hundreds of billions of desert locusts to protect their crops and livelihoods. A coronavirus outbreak would be like adding insult to injury.
Disruptions to the food supply chains, also likely to happen in April and May, could trigger excessive volatility and spikes in food prices in the short term. Vulnerable families with fewer income-earning opportunities could go hungry. Logistical constraints could disrupt fresh food supply chains, causing more food loss and food waste.
Rapid, targeted response can help households and businesses ride out the crisis. Policies addressing supply shocks are already on the way. Italy has extended tax deadlines for the tourism sector and has suspended mortgage payments. South Korea is subsidizing wages for small businesses. China has temporarily waived social security contributions. Central banks need to be ready to increase liquidity, especially for small- and medium-sized enterprises, and monitor the situation closely as the outbreak sweeps the globe.
Also important is targeting and sequencing policies to revive demand. This includes expanding major safety net programs and funding paid sick leave. Gig workers, who have been the engine of economic growth in the past decade, are being hit hard. Many face a choice between placing oneself under self-quarantine for public benefit and powering through food deliveries to pay the bills. It’s much more economical to help them take sick days now than to force them to continue to work when they are sick, which puts a larger population at risk. State and local governments need as much unrestricted funds as possible to do this. Cash, unemployment insurance and tax cuts on consumption can help the most affected folks stay afloat.
The spread of the coronavirus seems to be slowing down in China, but it is surging everywhere else. As I write this, nearly 125,000 cases have been confirmed and 4,600 people have died. For some countries, it’s already too late to contain the spread of the virus. But they can pivot to mitigate its spread — now. The sooner they can implement tough mitigations, the lower the scope of the global pandemic and subsequent damage to the economy will be. The coronavirus will affect every country. Even those without any confirmed cases need to take concrete policy steps now to limit the harm to their economies.
We were awfully unprepared for the pandemic. Perhaps through this painful, costly experience of dealing with the coronavirus, we can learn to change the way we live, so that we stop harming the environment and be better prepared next time.