BANGLADESH UNIVERSITY OF PROFESSIONALS

PRINCIPLES OF MACROECONOMICS
BDS:2311

TERM PAPER
on
The Macroeconomic Effect of a Contagion: Understanding The
Global And Local Macroeconomic Challenges With Possible
Responses.

SUBMITTED BY
Name: Hurrahtul Aine Tasfi
ID NO:19121044
Department of Development Studies
Session:2018-2019
 Abstract

This report discusses the macroeconomic impact of the

Coronavirus/COVID-19 crisis across industries, countries as well as the
whole world with possible responses. It also provides estimates of the
potential global economic costs of COVID-19, and the GDP growth of
different countries. In a strongly connected and integrated world, the
impacts of the disease go way beyond mortality. As such, governments
around the world have been preparing contingency plans, and aid
packages to sustain their economies. This virus that triggered a localized
shock in the China is now delivering a significant global shock. This
study simulates the potential impact of COVID-19 on Macroeconomics
sector like, gross domestic product, Global economy and trade. Firstly,
this report shows the local impact on economy and then the impact on
the global economy. This report then outlines some possible scenarios,
and their impact on economic prospects.
Finally, it concludes with a summary of some policy implications.
Introduction:
The coronavirus (Covid-19) has spread to nearly every country in the world. The disease has
already taken hold in Europe, the United States and South-East Asia and is beginning to wreak
havoc in Africa, Latin America and South America. The World Health Organisation is
particularly concerned at the ability of the poorest countries in the world to control the disease. A
rare disaster, a coronavirus pandemic, has resulted in a tragically large number of human lives
being lost. As countries implement necessary quarantines and social distancing practices to
contain the pandemic, the world has been put in a Great Lockdown. This is a crisis like no other,
and there is substantial uncertainty about its impact on people’s lives and livelihoods.

Method:
In this paper, we show how the coronavirus outbreak led to spillovers into major sectors of the
global economy .The discussion in this paper contributes to the financial crisis literature (Allen
and Carletti, 2010; Jagannathan et al, 2013; Mian and Sufi, 2010; Stiglitz, 2010; Ozili, 2020).
This paper contributes to the literature by showing that non-financial factors and/or non-
economic factors can trigger both a financial and economic meltdown in unprecedented ways.
The implication for financial stability is that future stress testing of the resilience of the financial
system should take into account human health factors as an important element in their stress
testing exercises. We focus on the period from the start of 2020 through March when the
coronavirus began spreading into other countries and markets as well as the whole economy.
Most of the data is collected from www.worldometers.info website which tracks covid-19
situation all around the globe.

Data and Findings:

Before the crisis, the global economy was already under strain from trade tensions, low
investment, weak confidence and high debt. Nonetheless, a sudden and deep contraction of the
global economy was not on the horizon. Now, the International Monetary Fund anticipates world
output to drop by 3% in 20207– much worse than during the 2008/2009 financial crisis – global
trade is predicted to collapse between 13% and 32%8 and foreign direct investment (FDI)
inflows are estimated to fall between 30% and 40%.9.
Further, an early analysis by IMF reveals that the manufacturing output in many countries has
gone done, which reflects a fall in external demand and growing expectations of a fall in
domestic demand. Worldwide, more than 436 million enterprises face high risks of serious
disruption. As a result of the economic crisis created by the pandemic, almost 1.6 billion
informal economy workers, out of a worldwide total of two billion and a global workforce of 3.3
billion, have suffered massive damage to their capacity to earn a living. This is due to lockdown
measures and/or because they work in the hardest-hit sectors.
Due to fear and uncertainty, and to rational assessment that firms’ profits are likely to be lower
due to the impact of COVID-19, global stock markets erased about US$6 trillion in wealth in one
week from 24th to 28th of February. The S&P 500 index lost over $5 trillion in value in the same
week in the US while the S&P 500’s largest 10 companies experienced a combined loss of over
$1.4 trillion,1 although some of these were recovered in the subsequent week. Some of the loss
in value was due to rational assessment by investors that firms’ profits would decline due to the
impact of the coronavirus.
Covid-19-related disruptions have led to millions filing for unemployment benefits. In April
alone, the figures were at 20.5 million, and are expected to rise as the impact of the pandemic on
the US labour market worsens. The unemployment rate in Canada in April was 13%, up 5.2
percentage points on March, according to data from the country’s official statistics bureau.
Japan’s unemployment rate is rising more slowly than in other G7 economies like the US. In
March, it was 2.5%, with 1.76 million unemployed – an increase of 20,000 from the same month
in 2019. A damaging impact on an economy as large as India’s caused due a total lockdown was
imminent. Unemployment went up to 26 percent on April 19, 2020. This was possibly a result of
a decrease in demand as well as the disruption of workforce faced by companies. Germany’s
unemployment rate has risen far less rapidly than countries such as the US report, since March
21, more than 36 million have filed for unemployment benefits, which is almost a quarter of the
working-age population. UNESCO reported that the COVID19 outbreak disrupted the education
of at least 290.5 million students worldwide.21 Public schools in the US were closed, Australia
shut down some schools, while countries like Israel, Nigeria, Egypt, Italy, France, ,Spain and
Bangladesh shut down all schools, and this created some form of unemployment for teachers.
Northern Ireland’s government suspended all examinations in its colleges and universities. The
coronavirus disrupted the $600 billion higher education industry.
The most visible outcome of the COVID-19 crisis on financial markets was the effect in the
global stock market. Global stock markets lost $6 trillion in value over six days from 23 to 28
February, according to S&P Dow Jones Indices. Between February 20 and March 19, the S&P
500 index fell by 28% (from 3,373 to 2,409), the FTSE 250 index fell by 41.3% (from 21,866 to
12,830), and the Nikkei fell by 29% (from 23,479 to 16,552). In the same period, large
international banks witnessed a plunge in their share price, for example, Citigroup’s share price
fell by 49% (from US$78.22 to US$39.64), JP Morgan Chase’s share price fell by 38% (from
US$137.49 to US$85.30), and Barclays’ share price fell by 52% (from £181.32 to £86.45).
Although the oil price war, in which Russia and Saudi Arabia were driving down oil price by
increasing oil production, played a role in the fall in stock markets indices, the subsequent fall in
stock market indices in March was mainly due to investors’ flight to safety during the
coronavirus pandemic.
The coronavirus triggered a new type of recession that was different from the past triggers of a
recession. For instance, the Asian debt crisis of 1997 was caused by the collapse of the Thai baht
in July 1997, which created panic that caused a region-wide financial crisis and economic
recession in Asia. The 2008 global financial crisis, which translated to a recession, was caused
by loose monetary policy which created a bubble, followed by subprime mortgages, weak
regulatory structures, and high leverage in the banking sector (Allen and Carletti, 2010). The
2016 recession in Nigeria was caused by the fall in the price of crude oil, balance of payment
deficit, adoption of a fixed-float exchange rate regime, an increase in the pump price of petrol,
activities of pipeline vandals and infrastructure weaknesses. The 2010 recession in Greece was
caused by the aftereffect of the global financial crisis, structural weaknesses in the Greek
economy, and lack of monetary policy flexibility as a member of the Eurozone. The International
Monetary Fund in March stated that it expected a global recession that would be at least as bad
as the 2007-8 global financial crisis followed by a recovery in 2021. (Georgieva, 2020)
.The sudden economic disruption caused by COVID-19 is not only destructive but also has
spillover implications because it created demand and supply shocks in almost every area of
human endeavor.

Discussion:
During this pandemic, the four components of GDP decreases. Because the consumption, saving
net export and investment also decreases in this outbreak. Governments are shutting down whole
commercial sectors to stop the spread of Covid-19, putting a massive crimp in gross domestic
product for months to come.
In terms of consumption: This outbreak is having a huge negative effect on consumption. A
large number population is hardly having access to their basic necessities let alone buying
luxurious things. Because they are jobless There is another reason of less income. The economy
is being affected due to both domestic disruptions and as a result of Bangladesh’s
interconnectedness with the global economy. At the domestic level, uncertainty will cause
private investment to decline further, impacting employment. With less employment and lower
incomes, the economy is also experiencing depressed demand. Firm and industries are less
confident about their future growth. So, they are less tending to start new projects and then
unemployment occurs. Thus, consumption is lower than ever in the recent period. Specifically,
the catering, hospitality, tourism, entertainment and transportation are among the worst hit
industries with revenues almost drying up. Certain pentup demands will surely be released after
the outbreak is over, but losses due to lack of catering and entertainment consumption during this
period will be hard to recoup, and the spending power of certain consumer groups may also
suffer from the outbreak. All considered, it is expected that the overall growth rate of retail sales
of consumer goods in the first quarter may slow down . It’s important to note that consumption
has become the number one driving force for economic growth in Bangladesh’s GDP.. As a
result of the outbreak, the contribution of consumption to GDP in 2020 will experience a big
drop. This is also one of the key reasons why the current outbreak is creating a greater impact in
GDP of our country.
In terms of investments: due to the outbreak, many businesses have been unable to resume
production on time and forced to have their production orders cancelled, and investments are
bound to shrink accordingly. However, all considered, investments will suffer less as compared
with consumption. The short-term suspension of work and production imposed by the delayed
return to work of the workers have limited actual impact on the enterprises. For infrastructure
projects, the resumption of work may be delayed for some projects, but the work will soon
resume one after the other when the outbreak is over. People do not want to invest in business or
in other industries because they may face loss with such kind of uncertainty. People are
consuming less and can not buy domestic or household products for lockdown situation. So,
investment is risky at this situation. There are some other factors that affect investment like
business confidence, interest rate, investment policy, national income. If firms are confident
about economy and its cash flow, they will more likely to invest in capital and new projects.
During COVID-19 pandemic, the prospect of profit and growth is bleak. That is why industries
do not want to invest in new projects or business. Bangladesh’s export income will shrink as
overall global demand decreases. But its imports are also being hampered — Bangladesh imports
many raw materials such as textiles, pharmaceuticals and leather from China for domestic
production. Foreign investment will also remain subdued.
In Bangladesh, the contribution of the remittance sector is significant particularly for stimulating
poverty alleviation, improving the standard of living and creating productive assets (Islam, 2011;
Bangladesh Bank, 2019). The country is the third-largest recipient of remittances within the
South Asian region (Bangladesh Bank, 2019). Remittance earning for a country depends greatly
a on host countries' economic activities, GDP growth and labour demands. The IMF on April 14,
2020 made a comprehensive forecasting of the global GDP change – considering the spillover
effects of the Covid-19 pandemic on major global economic sectors, including: tourism,
entertainment, hospitality, travel, and others. It is expected that due to the outbreak of Covid-19
pandemic, the remittance sector will face prominent losses incurring from the negative changes
in the per capita GDP of major host countries of Bangladeshi expatriates like: Qatar, the UK, the
KSA, Italy, and others. As remittances play a vital role in Bangladesh's socio-economic
advancement, maintaining its balance of payment and strengthening foreign currency reserves,
any decrease in remittance inflow due to the breakout of Covid-19 may jeopardize the country's
economic progress and poverty eradication.
The COVID-19 disease will have different effects on different industries in Bangladesh. . Local
industries that cater to domestic residents are also experiencing rapid decline in the demand for
their goods and services. Small and medium enterprises which employ millions of workers and
constitute the backbone of the economy appear to be more vulnerable. As they face massive
slump in demand, their existential challenge is to remain financially viable. As schools postpone
their new term, the offline programmes of social training and education institutions become
impractical, and commuters now can save their commuting time working from home, the
growing demands for online services will enable the fee-based online education and information
service providers to generate greater business income.
Generally speaking, it will have huge impacts on tourism, offline entertainment, hotels, aviation,
logistics, and labor-intensive manufacturing, while it will have a relatively favorable impact on
pharmaceuticals, e-commerce, online entertainment etc.
The COVID-19, however, shows us the long standing inequality in health care system and basic
services, financial products, digital economy as well as social securities of informal workers
where we can work to improve. Another is communication through digital platform and work
from home became as reality and in addition, people became technology friendly due to
lockdown.
Effect on global economy:
The COVID-19 pandemic is inflicting high and rising human costs worldwide, and the necessary
protection measures are severely impacting economic activity. The pandemic has pushed the
global economy into a recession, which means the economy starts shrinking and growth stops.
Countries like Iran, Italy and France issued stay-at home nationwide policies to control the
spread of the virus, which had already caused multiple deaths and was putting pressure on the
national public healthcare infrastructure. Such stay-at-home policies planted the seeds of
recession in developed countries, and there was a general consensus among economists that the
coronavirus pandemic would plunged the world into a global recession .Covid-19-related
disruptions have led to millions filing for unemployment benefits Unemployment rate of world
increases and this causes drop in consumption and investment. The unprecedented Covid-19
pandemic has caused disruptions to global trade, business, and education. Bangladesh is equally
affected by this contagion. The economic consequences of the Covid-19 outbreak are tough to
handle as the entire of the global supply chain has been interrupted due to worldwide
transportation shutdown. There are some details of global trade which condition is not so good.
 Oil: Due to the fall in travel, global industrial activity has been affected. Oil prices fell
further in March as the transportation section, which accounts for 60 per cent of the oil
demand, was hit due to several countries imposing lockdowns. Not only oil, early this year
in China, due to Covid-19-related containment measures, the demand for natural gas fell, as
a result of which many Chinese LNG buyers halted their imports as storage tanks filled.
 Industrial Metals: Due to lockdowns in China, followed by in the US and Europe, the
demand for industrial metals reduced as factories shut down. As per IMF, China accounts
for roughly half of the global demand for industrial metals.
 Food and beverages: IMF projects a decrease in food prices by 2.6 per cent in 2020,
caused by supply chain disruptions, border delays, food security concerns in regions
affected by Covid-19 and export restrictions.
In the lockdown period, while the price of cereals, oranges, seafood and arabica coffee has
increased, prices of tea, meat, wool and cotton have declined. Further, the decline in oil prices
has put a downward pressure on the prices for palm oil, soy oil, sugar and corn.
Globalization may take another negative turn due to Covid-19, scaling back the surprisingly
strong support for trade and immigration reported in recent polling. More international travel
does accelerate the spread of infectious diseases, and economic stress could boost calls for trade
protectionism. While robust public health strategies do not require ongoing barriers to
globalization, nationalist politicians will point to the pandemic and failures of international
coordination in the response to fortify opposition to globalization.
Customers and employees increasingly expect corporate leaders to take a stand on social issues,
making public opinion about globalization a potential management issue. The blending of anti-
globalization and anti-capitalist movements further complicates the role of business in the public
debate about globalization. And leaders of multinational corporations face the special challenge
of public and government engagement across national divides. Focusing on facts, becoming
more sensitive to inequality, and emphasizing real economic contributions can help to support a
healthier globalization debate.
The COVID-19 pandemic and the associated economic crisis are posing huge challenges, raising
many unknowns and imposing wrenching trade-offs. Both crises are global, but their impacts are
deeply local. The policy response to both crises needs to be rapid, even if it is rough around the
edges. But countries cannot pull this off on their own—the global crises require global solidarity
and coordination. Governments must dramatically overhaul policies and invest in public health,
economic stimulus, and social safety nets, to help countries recover faster from the COVID-19
pandemic. The economic report warns that a patchwork of preexisting solutions won’t work and
points out that governments must coordinate with each other to hasten the recovery. This is a
global crisis and working in silos is not an option.
The pandemic is also affecting financial markets and how they function. Monetary policy should
be used wisely to provide ample liquidity, ease financial stress of industries and small and
medium-sized enterprises, and, if necessary, relax macroprudential regulations temporarily.
External pressures need to be contained. Where needed, bilateral and multilateral swap lines and
financial support from the multilateral institutions should be sought. In the absence of swap lines,
foreign-exchange market interventions and capital controls may be the alternatives. Asian
economies have taken several initiatives in this direction with direct support for health sectors,
direct fiscal stimulus packages—which in some advanced Asian economies are substantially
bigger than the response during the Global Financial Crisis. And many economies have put in
place measures aimed at helping small and medium-sized enterprises

Conclusion:
The coronavirus pandemic is a health and economic crisis too, and that’s placing immense strain
on the world’s financial system. No one can accurately predict the final financial damage from
COVID-19. This obviously depends
on timing, the severity of the pandemic into future weeks/months, and countries' policy
responses.

References:

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 Allen, F., & Carletti, E. (2010). An overview of the crisis: Causes, consequences, and
solutions.International Review of Finance, 10(1), 1-26.
 Georgieva, K (2020). IMF Managing Director Kristalina Georgieva’s Statement Following
a G20
 Ministerial Call on the Coronavirus Emergency. IMF Press statement. Available at:
 https://www.imf.org/en/News/Articles/2020/03/23/pr2098-imf-managing-director-
statementfollowing-a-g20-ministerial-call-on-the-coronavirus-emergency
 CRS Report(2020): “Global Economic Effects of COVID-19”,Updated June 1
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pandemics”, unpublished manuscript, March.
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economic impact”,30 April
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expected losses?”Bulletin of the World Health Organization.
 Financial Times (2020). Global recession already here, say top economists. Available at:
https://www.ft.com/content/be732afe-6526-11ea-a6cd-df28cc3c6a68