Of course, the business has taken care of the stock levels. Companies that use Chinese components have more stocks than at other times of the year. It’s possible that someone could change the supply chain. Technology will help to mitigate the impact of the suspension of work in China, but not fully compensate for it. So part of the world economy can work even in quarantine. It doesn’t cancel the negative effect, but it’s a way to reduce it.
And what happens to demand? Fear has reduced the demand for certain services. People stopped going to shopping centers, cinemas, etc. The demand for travel has fallen all over the world.
The overall effect is still negative, but it is weaker than in the past, thanks to Amazon, Netflix and online games. After all, people who are at home with their families all the time need something to distract them. So online commerce is gaining momentum. And the demand for networked computer games increased by 40% year-on-year (PRC).
Also, the growth of online shopping will reduce the impact of the epidemic on demand. The impact on the demand for this or that company depends on what it trades. Luxury brands suffer. But for basic goods, the transition to online shopping can be a long-term trend.
The coronavirus effect is to reduce the demand for resources. Decreased 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 resources, it is not that simple. The canceled flight will remain the same. China is a large and not too efficient consumer of raw materials. China’s drop in GDP by $1 per capita has a more severe impact on global demand for resources than, say, a similar decline in GDP in the UK.
What could be the recession caused by Covid-19?
The vulnerability of major economies has increased as their growth has slowed down and economic activity in different countries is now less able to absorb shocks. Recessions can usually fall into one of three categories.
A real recession
In the classic case, it is a cycle of capital expenditure recovery that translates into a decline in economic activity. But external shocks affecting supply and demand can also push the economy into recession. Most likely, this is where the Covid-19 has a chance to strike at its carrier.
A political recession
When central banks leave key interest rates too high, they cause tension in financial markets, tighten credit conditions, and over time suppress economic growth. The risk of this scenario remains moderate: outside the U.S. rates have bottomed out or even gone negative, and the Fed was surprised by a 50 basis point drop in the rate. Regardless of the monetary policy reaction, the G7 finance ministers also promised financial support.
Financial instability usually accumulates gradually, over a long period of time, before being shot, affecting the financial sector and then the real economy. The situation in the markets varies from country to country, but it is difficult to identify the risks of a financial crisis in the critical American economy. Some commentators point to a bubble in corporate lending.
However, we doubt the fairness of the analogy with the situation with unbelievable loans during the last recession, because corporate lending does not provide growth to the real economy (as unbelievable loans provided growth to the real estate market).
Neither does debt on banks’ balance sheets. Both these factors mitigate the systemic risk of bankruptcy of small players in the credit market, although its possibility cannot be completely denied. It is hard to imagine that the Covid-19 can contribute to financial instability, but stress can cause a decrease in cash inflows, especially for small and medium businesses.
What is the likely scenario of a recovery?
Regardless of whether economies avoid recession, the scenario of a return to growth in the Covid-19 will depend on a number of factors. Let’s call these three scenarios V-U-L (according to Harvard Business Review).
This scenario describes a “classic” economic shock – a decline in production but implies that growth will eventually recover to the same level. In this case, annual growth rates may fully cushion the shock. While this scenario may seem too optimistic in the current grim situation, we believe it is the most likely.
It’s the ugly brother of the previous scenario. It implies a prolonged shock. Although the economy will return to growth, there will be a certain irrevocable decline in production. Is this possible with the Covid-19? It is possible, but to recognize this scenario as a major one, you need more evidence that the virus is causing real damage.
This scenario is an even uglier poor relative of the U and V. To recognize that it can materialize, you need to believe in the ability of the Covid-19 to cause significant damage to the structure of the economy, that is, to break something on the supply side – the labor market, the possibility of capital accumulation or productivity. This is hard to imagine, even if it is pessimistic to look at things because at some point we will be on the other side of this epidemic.
The outbreak of Covid-19 has forced people to do things differently
The coronavirus epidemic in the world can change entire industries and the way companies and consumers behave. Moving to online shopping can be a long-term trend, as can moving employees to remote work. Here are three ways to shift work, talent, and skills to where and when they are needed most.
1. Make work portable across the organization
Many organizations, such as Allianz and Cisco, have already set up internal project marketplaces that break down work into tasks and projects that can be matched with people from anywhere in the organization with relevant skills and availability.
2. Share employees in cross-industry talent exchanges
Many companies are doing tasks they never could have imagined. For example, Brooks Brothers and New Balance are now producing surgical masks and gowns, while Tesla, Ford, and GeneralMotors produce ventilators from car parts after idling their automotive plants due to plummeting consumer demand.
There is hope that when the epidemic begins to decline, the fear of the virus will also go down. But there are three obvious long-term findings
Global supply chains have a weak spot
The development of technology was already pushing production to localization. The robot factory in New York is replacing the one in Shanghai where people work.
People who had to work remotely might like it
And companies will suddenly find that employees are doing a great job from home. Changing working habits will change the demand for office property, transportation and technology.
Growth in online shopping
It has already taken place in most countries of the world. But people who will get used to online shopping in an era of the epidemic may not want to go back to the old method of shopping after the epidemic. The important point here is that economic data may not track it. If statistics underestimate online sales, consumer spending may seem to be less than it really is.
What’s the line on this?
After analyzing the data, we can make the following statements.
The extent to which the informal economy exacerbates the impact of the pandemic: Health care and the economies of countries with large informal economies are likely to be more adversely affected by the pandemic.
Prospects for low-income countries: the pandemic is severely affecting the populations and economies of the poorest countries.
Impacts on global supply chains: disruptions in global supply chains can exacerbate the shock effects of the pandemic on trade, production and financial markets.
Deep scars of the pandemic: it is highly likely that a deep recession would permanently damage investment, deplete human capital through unemployment and disrupt global trade and supply chains.