COVID 19: Economic impact.

There is little denying that the outbreak of the COVID 19 Coronavirus needed a policy response of lockdowns and suspension of key activities, like air travel and public events, which if not implemented could have had far serious health consequences to society. Whether self imposed or not, these policy decisions and the general slow down in social and economic activities have long term economic implications. Some countries, especially over populated and poor countries, have resisted a complete lock down given the weak economic sustainability within their systems to cater to the needs of the largely poor populations. While medical experts may be emphatic that such weaker economies and densely populated countries in Asia and Africa may not have yet seen the surge of COVID 19 inflections the decisions have not been easy.

Unlike the global financial crisis of 2009 this current economic downturn is caused by policy makers putting their economies into hibernation. In addition the footprint of this hibernation has been widespread and nondiscriminatory affecting the rich and poor segments of society in equal measure. Arguably one may feel the richer segments of society will be able to bounce back faster the reality is that the pandemics economic impact has been so far reaching that the rich having deeper pockets may not entirely isolated them for the COVID 19's impact.

This impact, in economic terms, will be over a few distinct segments of economic activities and will result in effects and stresses that will overlap and in a sense feed off each other. The foremost and most serious impact will be downturn in GDP across the globe and this will strain the indebtedness of nations, companies and individuals alike. A double digit decline in global GDP is very likely and already global trade is predicted to shrink by as much as 20%. This will give rise to more public and private debt and in the absence of a quick recovery, which is unlikely, will strain the financial system.  Particularly hard hit will be countries with already ballooning debt and weak social welfare infrastructures perhaps closing new avenues to borrow and thus potentially result in debt defaults.

In a number of cases governments have been quick to react with massive stimulus packages which US leading the pack with a $4 trillion stimulus package. Germany, UK, Spain, Japan, UAE, Saudi Arabia and others have been quick in creating the necessary stimulus packages which assure the economic downturn does not tailspin out of control and the necessary liquidity is there to support the financial system. However, other poorer countries do not have the luxury of such stimulus packages and may have to take fiscal measures, such a tax relief, lower interest rates etc, to try and stimulate their economies. It is likely that major lenders will support some sort of debt relief plan for these countries but this is more likely to evolve in the next few months rather be something immediate.

Another impact to the economy comes from the specifics of the lockdown having direct impact on some vital sectors of the economy. Such sectors would be Aviation, Hospitality, Tourism, general economic services, trade and the food industry. Perhaps the most noticeable impact will be and has been on the aviation industry. If planes don't fly and carry passengers eventually the debt supporting the planes and its operating costs eat up the company. While there is recognition that this sector must be the first to be revived and it is perceived that during May limited air travel will come back to the skies. However, this should not been expected to be quick ramp back to either full operations as before or indeed the passengers back to the pre-crisis levels. I personally believe that the aviation sector will take two to three years to recover and while some airlines may need a respirator to get through these difficult times, some may not make it.

The same can be said of the hospitality and tourism sectors which will be slow in their recovery and perhaps there will be needed a shrinkage of the market before it can return to health. Even if all restrictions on travel are lifted social behavior patterns suggest a sense of caution in people to make impulsive holiday trips. Global trade impact has already been seen though I would suspect that as normalcy returns global trade may be the first to show signs of a quicker recovery. The question remains whether producers of major commodities themselves have come out of this crisis in a healthy state or not.

The more micro impact of this will mean that governments will need to prepare bailout packages for major airlines, major companies and sectors within their economies. While the UK, USA, Germany have announced such packages have been created, though not yet touched, there is worry that countries like Italy, with its own massive national debt, may not have the resources to create rescue packages in such conditions. Indeed putting in place efficient and workable rescue packages for specific sectors is a vital element of any recovery.

The third and most significant impact of the COVID 19 will be on households and jobs. Indeed many countries have announced varying degrees of assistance schemes for households, but these are really relief schemes that can sustain a family for a month or two. Personal defaults on loans will sharply increase and the numbers of the unemployed swell. The social impact of this will be devastating to households and in some countries will and could lead to social unrest. Indeed the bet is that the quicker the economy is allowed to get out of this lockdown the return of the workforce from the hibernation will soften the impact of unemployment. However, this is a gradual process and could take a little time.

These three broad areas of economic impact also suggest the way forward for policy makers. Essential to a return to economic health of the global and regional economic systems is to quickly develop a strategy of exiting this economic hibernation that the lockdown has forced upon us. At some point in time the health imperatives will have to give way to the economic imperatives of a revival of the economies. In essence this is a balancing act and each country will have to measure how successful it medical response to COVID 19 has been and at what point of the pandemic curve can they ease the lockdowns. Clearly and complete and immediate release from a lockdown may not be advisable but a graduated response to the situation is highly possible and both medical and economic experts will have to work in tandem to achieve this.

A second and more challenging policy decision will be to deal with the economic fallout of the COVID 19 pandemic at the macro level. While stimulus and relief packages are much like band aid that the moment I do believe that the world economic system, especially the IMF and World Bank, will have to consider some longer term monetary impetus to especially the poorer and hardest hit countries. I would suggest that consideration be given to a Corona Bond structure which would essentially be a 30 year low interest bond which can be tied in its repayment to the GDP and other indicators of each borrowing country. This will allow the breathing space to achieve recovery in these countries over the next 3 to 5 years and then a gradual pay down of the debt, Such bond should come with minimum collars and conditions other than to pre-agree the deployment of these funds in essential economic recovery segments of each country. This would imply and deployment model that would vary from country to country.

The more complex and perplexing task will be dealing with the pandemics effects at the individual and household levels. The impact of this crisis will change the demographics of the work force without a doubt with some sectors losing jobs for an indefinite period, i.e aviation, tourism etc, and others, like health and industries involved in production of medical supplies, needing additional labor. For labor economists this would suggest an opportunity to retrain the workforce and eventual place them in the right sectors, but this is easier said than done. Relief packages cannot be sustained in the long run, even in strong social welfare economies, and measures taken at the macro economic level will have to trickle down into the economy to start having an impact on households. This implies it will be a painful process of waiting and readjusting and this is where the policy makers will be tested to the maximum.

Social unrest in the weaker economies with already chronic poverty cannot be ruled out and come socio political systems like say Venezuela may not be able to sustain any modicum of order even through the barrel of a gun. In this wider framework it is important that the world leadership work together to alleviate the hardships on households across the globe and avoid a break down of society at it most basic foundation.


In conclusion there is no one definitive path of decision making that can assure success. Each socio-economic system has its own challenge which has been severely effected by the COVID 19 pandemic. Indeed a vaccine may emerge in another year and then it may take another year or two for this vaccine to have been used enough to secure a healthier virus free future, but leaders must understand that there is no hyper drive to get us from today to there without considering the current and longer term impact of COVID 19. One thing is for sure that decisive policy makers will stand out as having made the better choices and perhaps the harder decisions, who they will be the verdict is still out there.