How Coronavirus Pandemic May Affect the World Economy

The coronavirus epidemic in the world can change entire industries and patterns of behavior of companies and consumers. The transition to online shopping can be a long-term trend, as well as the transfer of employees to a remote mode of operation.

The global economy is more affected by the number of people who are afraid of the COVID-19 coronavirus than the number of cases. Fear changes people’s behavior. And he changes the behavior of those who make decisions. Fear of the virus is changing supply and demand in the global economy. The proposal is affected by the suspension of production in China, which reduces global production. Today, China’s share in the global manufacturing industry is about 25%. In 2003, when SARS was rampant, this indicator in China was only 11%. Today, China is a link in global supply chains. So stopping production in China will reduce economic activity in the world, and also affect the performance of other companies in the supply chain.

Of course, the business was concerned with the volume of stocks. During the lunar New Year period, companies using Chinese components may have more stocks than at other times of the year. It is possible that someone could change the supply chain, although last year’s trade conflict between the United States and China showed that this takes time. These measures will help mitigate the impact of the suspension of work in China, but not fully compensate for it. Technology can mitigate some of the problems. Someone can work from home, economists for example. That is, part of the global economy is able to work even in quarantine. This does not cancel the negative effect, but it is a way to reduce it.

Let’s shift our attention from the bad news for a bit and talk about a way to make the pandemic period a little bit easier for yourself. As everyone is sitting at home and tries to have fun, online dating services became even more popular. And if you want to find someone to make this time easier for yourself or you want a serious relationship in your life – you can use one of the thousands of online dating services to meet your soulmate.

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And what happens to demand? Fear has reduced the demand for certain services. In China, people stopped going to shopping centers, cinemas, etc. The demand for travel fell all over the world. At the same time, online trading is gaining momentum in some places. And the demand for online computer games in China has grown by 40% year on year. People who are at home with their family all the time need to be distracted by something. The online economy is a great distraction. This is one of the key differences between the current situation and the times of SARS. The growth of online shopping will reduce the impact of the epidemic on demand. The effect as a whole is still negative, but it is weaker than in the past, thanks to Amazon, Netflix, and online games. The impact on the demand of a company depends on what it sells. Luxury brands are suffering. Such products are bought personally, and not on the Internet. This is “shopping as a vacation.” Going to a luxury store is part of the pleasure of shopping. But for basic products, the transition to online shopping can be a long-term trend.

For emerging markets, the effect of coronavirus is to reduce resource demand. Declining demand for raw materials such as copper can recoup losses as production resumes. This “accumulated” demand will support prices in the future. But with energy, everything is not so simple. A canceled flight will remain canceled. China is a large and not very efficient consumer of raw materials. A decrease in China’s GDP by $1 per capita has more severe consequences for global resource demand than, say, a similar decrease in UK GDP.

This is also important for world inflation. The overall outcome of the epidemic is likely to be a decline in global inflation. This is due to the fact that reduced demand for raw materials leads to lower prices for it. A smaller demand for services (for example, hotels) is also likely to lead to lower prices for them, at least in the short term. Problems in supply chains, in theory, can raise the price of finished goods. However, the business is usually not in a hurry to raise the price of goods if supply problems are temporary. If a company expects the virus to cause problems for a month or two, it is unlikely to upset buyers by raising prices for such a short time. It is worth noting that during the trade war between the United States and China, American companies generally did not raise selling prices in order to pay trade duties. Coronavirus can make long-term changes to the economy. It is hoped that the virus will begin to weaken in a few weeks. And when the epidemic begins to subside, the fear of the virus will also decline. But there are three obvious long-term conclusions.

Human tragedy

Let’s start with the human factor. I will write about the United States, but a similar analysis applies to Europe. The usual seasonal flu kills 10 to 60 thousand people in the United States – this is about 0.05% -0.1% of all infected. The mortality of coronavirus is from 1% to 3%, that is, 20-60 times higher than seasonal flu. When I wrote this text, more than 100 thousand people were already infected with the coronavirus, and the number of victims was 3 thousand. Most of the infected and dead are in China, South Korea, and Italy.

In the United States, there were fewer than 100 confirmed cases, but people can carry the virus for weeks without obvious symptoms, and since American test systems did not meet the standard, it is quite likely that the virus has already spread widely throughout the country.

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It is possible that coronavirus will affect Americans less than China: the population density of China is many times higher than the United States (where 1.5 billion people live mainly on the coasts), and it is an important factor in the transmission of the virus. And most importantly – the Chinese government seemed to repeat the erroneous instructions of the Soviet government during the Chernobyl disaster – it deceived and misinformed people, even punished those who tried to warn about the virus.

Today, the United States and the rest of the world certainly do not downplay the severity of the virus. Authorities restrict communication with infected countries, arrange quarantine for those who could contact infected people. Companies are reducing travel. People put off holidays. I assume that we will witness the cancellation of major events. Unlike China, the United States had enough time to let its government and health care system prepare for an answer.

Their answer will not be perfect. At the time of this writing, I came across a headline that reported that 120 nurses were quarantined due to contact with a patient infected with the coronavirus. But let’s imagine that in the end, in China, the death toll will increase by six times and will be equal to 20 thousand people (I really hope that this does not happen) If you ignore all the above “soft” factors, you just take the Chinese statistics and share it by 5 (this is the difference between the Chinese population of 1.5 billion and the US population of 300 million), then it is estimated that COVID-19 will take 4 thousand lives in the United States. This seems like a lot, but the difference between the harmless flu in 2012 (12 thousand deaths) and the serious flu in 2018 (61 thousand deaths) in the USA was 49 thousand deaths!

The serious flu epidemic in 2018 allowed most Americans to lead a normal life. For some time, the coronavirus will make their lives completely irregular and the media only contribute to this. And all this leads us to a not-quite-normal economy.

China – the epicenter of the crisis.

The influence of China on the United States will be double – as a consumer of American goods and as a global producer. Chinese consumption of foreign goods will obviously decline, which will affect some companies more than others (for example, car sales fell 92% in February). But overall, from a macroeconomic perspective, US exports to China are about $ 100 billion – just a small pimple of $ 21 trillion to the US economy, which can take away only a few hundredths of a percent of our GDP growth.

The effect of interruptions in the Chinese industry will be more tangible. Quarantined cities and factories, as well as limited travel, affected the Chinese industry. China in February reported its worst-ever production performance – it was even lower than during the Great Recession (ed. 2008 global economic crisis). America imports goods from China with a total value of about $ 350 billion. And this in itself is not a terrible number, but in addition to collecting iPhones and making T-shirts, China produces components for a large number of other products. And then everything becomes very complicated: if you miss one car part worth $ 10, suddenly you can’t sell a car worth $30 thousand dollars.