Economic Impacts of Coronavirus

Every hour, our phones, emails, and text messages are inundated with developments about the COVID-19 (Coronavirus) epidemic. The virus, which originated in Wuhan, China only months ago, has now become a pandemic, as it has so far infiltrated most parts of Europe, Asia and North America. While the world conferences about how to treat, cure, and prevent this crisis, the implications of a disease like this have a far greater reach than the domain of public health. When coronavirus first hit the United States, the stock market plummeted and caused traders to fear what effect the virus could have on the short-term economic future. While it seems that the US economy has rebounded slightly, COVID-19 continues to wreak havoc among different sectors. Here’s how the epidemic is currently affecting the world’s economy. 

Manufacturing Worries and Disruption in Supply Chain: Because Fortune500 companies, like Apple, rely on a global network of supply chains, their internal logistics have been severely disrupted. Since production on many goods “Made in China” has been slowed or shut down completely, the subsequent supply of various products within daily life has diminished, altering the world’s consumption habits. Currently, China accounts for roughly 16% of global output. This number could plummet depending on the duration of current restrictions placed on factories.

Sharp Decline in Tourism: As organizations, including universities and corporations, issue travel warnings, travel experts are predicting a mass decline in international and domestic tourism. Many locations rely on tourism as a significant part of their local economy. Especially as the weather gets warmer, European nations like Italy and domestic regions like California depend on an influx of visitors to bolster consumption and the economy. Since travel is restricted or otherwise frowned upon, many countries and cities around the world are facing economic uncertainty.

Impact on GDP: Economists struggle to pinpoint the exact impact that a potential epidemic could have on national and international GDP levels. Currently, they estimate that the level of disruption caused by coronavirus is “manageable.” However, rough estimates show that the virus has potential to cause mass decline. A recent CNN article estimates that could generate “economic losses equal to nearly 5% of global GDP, or more than 3 trillion dollars.” Even a smaller epidemic, namely the 2009 H1N1, sheared close to 0.5% off of global GDP. For reference, coronavirus, and the hysteria surrounding the outbreak, is a much more severe epidemic than H1N1.

Intervention by Federal Reserve: Central banks in and around China slashed interest rates early on in the face of the economic downturn. The US Federal Reserve (the governing body that oversees banks and sets interest rates) recently cut rates to record lows, which is a measure meant to help the economy rebound. However, the intervention ratcheted up the level of fear among Wall Street bankers and investors, as they read the move as a precursor to an upcoming recession… the opposite of the Fed’s intention. 

Overall, the economic downturn associated with COVID-19 is reminiscent of the 2003 SARS outbreak, which caused a temporary drop in the market, followed by a quick rebound. However, with the pandemic rapidly spreading, the future of the world’s economy is uncertain at the moment.