National economy in the face of the lock-out due to the corona

pandemic

COVID-19 is not only a global pandemic and public health crisis; it has also severely
affected the global economy and financial markets. Significant reductions in income,
a rise in unemployment, and disruptions in the transportation, service, and
manufacturing industries are among the consequences of the disease mitigation
measures that have been implemented in many countries. It has become clear that
most governments in the world underestimated the risks of rapid COVID-19 spread
and were mostly reactive in their crisis response. As disease outbreaks are not likely
to disappear in the near future, proactive international actions are required to not only
save lives but also protect economic prosperity.

In this brief, we outline the direct and indirect costs of the COVID-19 pandemic
which may impact the global economy. For the purposes of discussion, the indirect
impacts have been broken down to supply and demand shock, however, the various
sectors, agents and markets in the economy are interdependent and will have knock-
on effects on one another. Short term impacts will lead to a loss of wages and capital
flows which may lead to more systemic long-term effects changes.

Direct costs

Direct costs include the cost of testing and contact tracing, in addition to the costs of
hospitalisation, intensive medical care, control interventions for managing the disease,
and the salaries of health care workers. They will also include the cost of vaccines,
treatments, rapid diagnostic tests and antibody tests, if and when they become
available. The true direct costs would also include the costs of research and
development of new therapies and vaccines, although assigning a value to these may
be challenging. Direct costs also include out-of-pocket (OOP) expenditure. In low and
middle-income countries, this may comprise up to 50% of all health expenditure if
governments do not make provisions for free testing and treatment for patients with
COVID-19. OOP expenditure includes the costs of transport to/from hospitals for
testing and treatment and other expenditures such as the cost of protection measures
that households/businesses would not otherwise have spent money on, for example
purchasing hand sanitizer and disinfectants.

Indirect costs

Indirect costs are all of the additional costs associated with either being ill or the
economic impact of behaviours adopted to avoid becoming infected. They incorporate
productivity losses arising from worker absenteeism due to morbidity and mortality,
including the loss of wages as well as opportunity costs. They also include spillover
effects on the economy from aversion interventions that are either government or self-
imposed to avoid exposure to the virus. The outcome of these effects induce both
supply and demand shocks. Supply shocks arise from the closure of businesses,
hotels, restaurants and other businesses that are deemed “non-essential”. Demand
shocks result from decreased consumption, travel, transport and other unnecessary
expenditures. Each of these are discussed separately below.

Supply shocks

Manufacturing and production

Production in China was substantially affected by the government-imposed shutdown

in Hubei province and other areas. Hubei province plays a major role in the Chinese
economy, as the largest transportation hub in central China and a significant industrial
base that includes a mixture of traditional and hi-tech sectors, such as automobile
manufacture, food processing, electronics equipment manufacturing, textile factories,
and petrochemical industries, as well as iron and steel production. Many
manufacturing firms around the world rely on imported intermediate products from
China and other countries affected by the disease. For example, some car
manufacturers, including Nissan and Hyundai, temporarily closed their factories
outside of China because they were unable to get the parts they needed.

The slowdown in economic activity—and transportation restrictions—in affected

countries will have an impact on the production and profitability of specific global
companies, particularly those involved in manufacturing or in producing the raw
materials used in manufacturing. Small and medium-sized firms, especially firms that
rely on intermediate goods from affected regions and which are unable to easily
switch sourcing these goods, may have greater difficulty surviving the disruption.
Returning businesses to operational health after such a severe shutdown will be
extremely challenging, with most industries needing to reactivate their entire supply
chain.

Supply chain disruption

Businesses around the world are dealing with lost revenue and disrupted supply
chains due to China’s factory shutdowns. China has become the primary source of
many crucial medical drugs, including penicillin, heparin, and medications essential
for surgery. Up to 80% of the world’s basic ingredients for manufacturing antibiotics
are produced in China. The US pharmaceutical industry reported fears of drug
shortages as India faced lockdowns on 24 March. India is the world’s leading
producer of high-volumes of sterile injectable drugs, supplying almost half of the
generic drugs used in countries such as the US. On 27 February, the US Food and
Drug Administration (FDA) released a statement saying the US was experiencing its
first drug shortage directly related to the COVID-19 pandemic. These stockouts can
leave many people without the essential medicines they need.

At the same time, supply chains have been experiencing systemic demand shocks.
The shortage of masks, gloves and other personal protective equipment, in addition to
shortages in the numbers of ventilators, has been well documented. On top of this,
some individuals have been stocking up on groceries and household items in
preparation for compliance with restrictions on movement, in some cases buying
several months’ worth of goods in a single day, particularly if they begin to see
shelves with low levels of stock. A classic example of this is hygiene products, such
as toilet paper, hand sanitizers and surface disinfectants, which have seen sudden
spikes in demand, leading to panic buying and stock-out situations. The shortages are
compounded by the scarcity of air and ocean freight options to move products, hence
lead times have doubled. An Institute for Supply Management survey revealed that
more than 80% of companies believe that their organization will experience some
impact because of disruption due to COVID-19. Of those, 16% of companies reported
having already adjusted revenue targets downward by an average of 5.6% because of
the pandemic.

The COVID-19 pandemic has shown that supply-chain disruptions could wreak
greater havoc on the global economy than most governments had realized. Businesses
that are nimble enough to switch suppliers and that have sufficient liquidity to survive
periods of low sales and revenue will have a competitive advantage.

Conclusion

As the spread of the virus is likely to continue disrupting economic activity and
negatively impact manufacturing and service industries, especially in developed
countries, we expect that financial markets will continue to be volatile. There is still a
question as to whether this unfolding crisis will have a lasting structural impact on the
global economy or largely short-term financial and economic consequences. In either
case, it is evident that communicable diseases such as COVID-19 have the potential to
inflict severe economic and financial costs on regional and global economies. Because
of high transportation connectivity, globalization, and economic interconnectedness, it
has been extremely difficult and costly to contain the virus and mitigate the
importation risks once the disease started to spread in multiple locations. This
warrants international collective action and global investment in vaccine development
and distribution, as well as preventive measures including capacity building in real-
time surveillance and the development of contact tracing capabilities at the national
and international levels. As outbreaks of novel infections are not likely to disappear in
the near future, proactive international actions are required not only to save lives but
also to protect economic prosperity.