The Effects of Covid-19 on our Economy

For a long time, there has not been such an acute crisis in the world. The pandemic that has emerged after the outbreak of the new coronavirus called SARS-CoV-2, which causes the disease COVID-19, has not only claimed many lives and infected thousands of people but has also impacted the world economy.

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This type of coronavirus has already killed more than 34,000 people worldwide, and authorities have reported around 700,000 cases of infected people. This is quite worrying considering that although the majority of cases were originally concentrated in the Chinese city of Wuhan, the virus left the country and has spread to 187 countries.

Now, we can see how this disease appeared in all the planet's continents, and it has paralyzed a large percentage of companies and industries. Even when there were only a few infected but its high contagion was already known, it was expected to influence transactions derived from oil, variable income, and global growth estimates.

This is something that we can observe in some Asian countries. For example, according to a report by the Asian Development Bank (ADB), the crisis stemming from COVID-19 is about sharp falls in domestic demand, and trade and production ties, reduced tourism and business travel, interruptions in supply or health effects.

So, having all this information in mind, it is common to wonder... How is coronavirus affecting the economy? And, to answer it, there are many factors to consider. For example, on February 16, Kristalina Georgieva, managing director of the International Monetary Fund, warned that the growth of the world economy (estimated at 3.3% for this year) could be cut between 0.1% and 0.2% due to the pandemic and the measures that governments have had to take to deal with it.

So, to try to answer that question, we have some relevant data.

COVID-19 and the economy: What have been the most affected areas?

It is difficult to understand, but when we talk about economics, we must take into account absolutely all the sectors involved. Many people may think that the financial status of a region is defined by the number of products it produces, but the truth is that it goes much further.

If there are economies in the world that are sustained by the production of some goods, but we also have to take into account services. An example of this is tourism, this industry significantly nurtures the financial systems of many countries around the world and, for these days, we can say that there are few airlines and airports that are working.

During this first quarter of the year, the price of oil had its lowest drop in 20 years. And, although it did rebound on March 19, a further continued drop in the price of oil could be more challenging for exporters, especially those who depend heavily on its sale.

In addition to this, there are a few other ways that COVID-19 can affect the economy, including:

- Direct impact on production: We have mentioned it previously; there are a huge number of production companies that have had to freeze their work. An example of this is China; its production was highly affected, especially when the province of Hubei had to be closed. Similarly, this slowdown in China also has repercussions in exporting countries; this can be seen in Latin America, for example, where China represents more than 9% of the region's exports.

- Disruption of the supply chain and the market: Many manufacturing companies depend on imported inputs from countries highly affected by this disease, such as China and the United States. Similarly, some companies remain standing only due to the sales they generate in China, and this has also been progressively paralyzed. In summary, there is a slowdown in economic activity with restrictions on transport, lower raw materials, and lower demand. These are all facts that, out of control, can destroy a country's economy. Also, those companies that depend on imports from affected countries and companies linked to travel and tourism are facing losses that are probably not recoverable.

- Financial impact on companies and financial markets.

All temporary input and/or production shocks could put under staring some companies, particularly those with insufficient liquidity. We will explain this in the simplest possible way; there are fear and uncertainty. This leads entrepreneurs to act negatively for their companies and, consequently, affect the economy of the region in which they operate. Likewise, this increased risk can generate investment positions that are not profitable under current conditions. Basically, entrepreneurs will stop making investments and pause the flow of money to avoid losses.

There are also other ways that COVID-19 can affect the economy.

- If schools, shops, shopping malls, and theaters are closed, then there will be very few people working, thus increasing the unemployment rate.

- Oil exporting countries will be affected by an oversupply of crude oil in world markets. That is, they will hardly be able to sell the barrels or will have to market them at very low prices.

- Economic recession around the world: When we talk about recession, we are referring to the decline in economic activity in a region. In this case, COVID-19 has directed us towards a global recession in which the annual variation rate of GDP is negative for two consecutive quarters. This might be short but it will undoubtedly be the strongest we can remember.

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The virus itself will be transitory. This means that it will peak and then decrease. But the problem is that the side effect of a combination of different political responses coming from different countries (with contrary opinions) has produced a global economic impact that has not been seen since the oil crisis of 1970. COVID-19 covers both the dislocation for the supply of goods and services and a sharp reduction in consumer activity. In other words, there is no production (or there is scarcity), so there is no supply, prices and wages vary (negatively) and the level of demand falls.