THE IMPACT OF CORONAVIRUS Volume 1 Issue 2

Economic Effects of Novel Coronavirus (COVID –

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19) On the Global Economy

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By Gilbert Ndutu Munywoki

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September 2020

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Abstract

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At the end of 2019 December, the world registered an outbreak of an international pandemic, at
China’s Hubei province. At the beginning of 2020, the virus started spreading to all corners of
the world. The new novel Coronavirus Disease-19 is expected to affect global economic growth,
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development, stability and even recovery once the disease is over. Businesses that rely heavily on
face-to-face module are likely to face huge economic losses as compared to those whose
employees can work from home. The complex interconnected system of different economy actors
makes the effects of the pandemic to be transmitted relatively equally to all countries. The world
is on verge of witnessing a lapse in economic growth in terms of lack of employment, defaulting,
disruption of supply chains, slow production growth and decline in global shares. Worse still,
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the adverse effects of Coronavirus disease will hit hard on emerging markets (EMs) who rely on
local and external credits that are subject to domestic and international currency (FX). As the
world continues to embrace protective measures to cut down transmission rate and keep the
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pandemic in control, more feasible and holistic approaches are needed to effectively inflate the
bubble and enable the global economy to thrive.
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Keywords: COVID-19, coronavirus, employment, lockdown, emerging markets, Gross

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Domestic Product (GDP).

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This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3757421
 THE IMPACT OF CORONAVIRUS Volume 1 Issue 2

The Nature of Global Economy

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The global economy is a dendritic in nature and a shock in one region is felt all over the world.

The 21st world economy is an intricate system of interconnected parties, ranging from

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employees, business organizations, manufacturers, consumers and banking institutions

(Gourinchas, 2020). At any one point in time, every individual is another person’s customer,

boss, worker or lender in some way. The increased inter-connectedness and specialization of

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activities, a major shock in the supply chains will have a huge economic effect. A good example

of how interconnected the global market is how the increase in the United States' mortgage

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bubble led to the rise of the value of US-tied real estate securities which consequently caused a

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global banking crisis between 2006 and 2008 (Rakic, 2020. The crisis greatly affected the global

economy by bringing about disruptions in the capital market.

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The economic impact brought about by a pandemic is measured with a cumulative time series

data, such as the rate unemployment, the rise or fall of GDP and the global industrial production.
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Because the pandemic happens in real time, data to measure the impacts of the disease to

economy is only gotten after a certain lag such as a week or a month. For instance, Lewis and
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colleagues developed a weekly economic index (WEI) by getting datasets from ten economic

variables measure COVI0-19 impact to the U.S economy (Lewis et al. 2020) In their study, they
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found out that between March 21 and March 28, the weekly economic index reduced by a 6.19%

Introduction

Coronavirus pandemic, is negatively affecting all aspects of life village, community, society,
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nations and in the global community. The virus, designated as a new coronavirus (severe acute

respiratory syndrome coronavirus 2, or SARS-CoV-2), which was later called Coronavirus

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Disease-19 or COVID-19 is weighing down global economies (Qiu et al., 2020).The deadly

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3757421
 THE IMPACT OF CORONAVIRUS Volume 1 Issue 2

virus, which originated from a Wuhan, Huber province in China has posed a threat to the social

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and economic challenges in the world (Katz & Gostin, 2020). The world has also faced an

increasing political and cultural polarization as governments put in measures to contain the

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deadly disease.

The virulence of the disease has cut all forms of social relations, and the escalating number of

infected persons are threatening to overwhelm the present health facilities. From the economist

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point of view, the novel is most definitely spreading economic suffering globally, and the virus

may be as highly contagious economically as it is medically. To fight the spread of the virus,

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people have put on public health safety precautions such as social distancing, which is the most

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preferred strategy, where people are advised to stay indoors, and reduce unnecessary movements

(Fong et al. (2020). Businesses are closing down, with the hospitality and entertainment
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industries sinking deeper in the losing end (Barro, Ursúa & Weng, 2020). As Businesses shut

down, the number of unemployment increases exponentially.

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The global Gross domestic product is also declining, and most of the developing countries are

facing capital flights. Economists estimate that major economies will at least shed 2.4% of their
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GDP by end of 2020, shifting the 2020 estimates of world’ economic growth from 3.0% (Duffin,

2020). Investors are pulling out of the market due to the unforeseen dangers that the virus
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threatens to elicit. The aim of this paper is to review different emerging literature on the

economic impacts of COVID-19 on the global economy. The paper will put a spotlight on 6 key
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broader areas:

i) Insolvency and defaults

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ii) Decline in production growth

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3757421
 THE IMPACT OF CORONAVIRUS Volume 1 Issue 2

iii) Disruption of demand, supply, and finance in the World Economy

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iv) Challenges in global value chains and

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v) Decline in global shares.

Increase in Unemployment Rates

With the looming dangers coronavirus pandemic is threatening, a partial or absolute lockdown

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initiative are now affecting almost 2.7 billion employees, which represents almost 81% of the

global workforce (International Labor Organization, 2020). With the current situation of the

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disease, businesses enterprises across a scope of economic sectors are on the verge of major

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economic losses, which puts a threat to their operations and creditworthiness, especially among

the small-scale businesses, while millions of employees in the world are facing an imminent
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income loss and ultimate layoffs. In most countries, companies have embarked on contraction of

employment on a large-scale basis. The changes in working hours, sends a clear picture on the

dreadful uncertainty of the present circumstances in the labor market.

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In the United States the counter-protective measures to the disease sparks an increasing rate of
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joblessness as people are forced to stay home (Rojas et al., 2020). In their study, Gupta et al.

2020 discovers that the employment rate in the US declines by a 1.7% for every extra 10 days
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that a state enforced a stay-at-home regulation between March 12 and April 12. On the continued

major shifts of working hours, the International Labor Organization (ILO) posits that as from the
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1st of April this year, the working hours will face a downward curve by 6.7% in the second

quadrant of 2020, which corresponds to 195 million all-time employees (International Labor

Organization, 2020). The number and rate of annual job losses by the end of the year will depend
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majorly on the development of the pandemic and the mitigating initiatives put in place.

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3757421
 THE IMPACT OF CORONAVIRUS Volume 1 Issue 2

Many of the unemployment cases and declining working hours will occur in regions with the

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high rate of virulence. In addition, some organizations are opting to axe the employees who are

unable to do their tasks at home (Adams-Prassl et al. 2020). The youth and people who lack

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tertiary education stood high chances of losing their income. In addition, many jobs prove to be

hard to do at home as compared to those that need face to face engagement. In their research,

Dingel and Neiman, (2020) to investigate the feasibility tasks that can be done remotely, result

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shows that only 37% of jobs can be comfortably done from home. From the study, we can also

deduce the anticipated rate of recovery of different sectors of economy. When the world comes

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to lifting travel restrictions and lockdown, the sectors of economy with low face-to-face and low

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home-based work efficiencies such as processing and warehousing are expected to thrive faster.

Contrary, sectors with low home-based-work efficiencies and increased face-to-face interactions
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such as food serviced and entertainment are expected to have slow recoveries.

The labor organization predicts that 1.25 billion workers, which is close to 38% of the world’s
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labor force, are employed in departments facing serious reduction in output and an increases

likelihood of workforce displacement. Core sectors that are facing this reduction in production
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includes manufacturing, retail trade, food industry and hospitality. In the U.S, business

enterprises have greatly cut down their job vacancies from the start of May 2020 (Kahn et al.
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2020). Kahn and colleagues also find that the reduction in the number of job vacancies is cross-

cutting in all states, irrespective of which state reported their first case of the disease first than

the others. In addition, the reduction in job opportunities was uniform in all occupations except
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those occupations that are highly involved in the pandemic such as nursing and other essential

services. Essential services are those goods and services people cannot live without such as
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security and provision of energy and water supplies.

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3757421
 THE IMPACT OF CORONAVIRUS Volume 1 Issue 2

Insolvency and Defaults

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The global rise of COVID-19 cases is threatening to cause major capital flights in different

countries. For example, countries such as Turkey, Argentina, and South Africa, are feared to be

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facing cases of insolvency and deftness soon. The capital flights will be further be fuelled by

devaluations of the national currency of these countries.

Figure 1: Coronavirus Cases and Deaths – Global Pandemic (as on 23 June)

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Source: Coronavirus Resource Center, John Hopkins University

The COVID 19 pandemic will cause a serious problem with the foreign exchange
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markets. There have been a constant rise in oil prices and a drop in exchange rates of

main emerging market economies such as the South African Rand, the Brazilian real,
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Mexican peso, Russian rouble and Turkish lira. Advanced economies will have their

currencies strengthened such as the EUR, USD, JPY, and CHF.

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The Peso of Argentina continues to depreciate by a 6%, in comparison with the dollar. Also, the

Lira of Turkey has devalued by 10% since the beginning of the year, as investors continue to pull
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out their money and companies face economic crises. The condition of capital flights is

becoming inherent in other low and middle-income nations, raising concerns on urgent remedy

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 THE IMPACT OF CORONAVIRUS Volume 1 Issue 2

from policymakers and the global community. Across the globe, business enterprises and

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households are going to get into greater debts (Boissay & Rungcharoenkitkul, 2020). This will

increase the rate of insolvency and defaults. The pandemic may still be waiting to unleash the

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greatest emerging market (EM) crisis of the recent times. The emerging markets are experiencing

a fall in domestic and international demand, high external credits, and commodity bust and

currency devaluation. In addition, the governments of these emerging markets may increase

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domestic borrowing to boost fiscal resources to combat the virus (Çakmaklı, Demiralp, Kalemli-

Özcan, Yesiltas, & Yildirim, 2020). The action will consequently mount pressure on external

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finance premiums, that cuts down capital inflows and offsetting external borrowing becomes

hard to achieve.

Decline in Production Growth

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The United Nations Industrial Development Organization’s (UNIDO) data depicted a continued

slowdown in production growth, showing a cumulative economic slowdown retardation even

prior to the onset of the coronavirus pandemic. The rate of production of manufacturing goods
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dropped below the relative standard mark of 1% and remained at 0.7% in the fourth quadrant of

2019. Statistical report indicates that only the foodstuff, beverage and basic pharmaceuticals had
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a remarkable positive year-over-year rate of growth in the fourth quarter of 2019.

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These three sectors of the industry that produce essential consumer goods are estimated to

continue to bloom in the long-run. On the contrary, other manufacturing industries are expected

to face a major economic loss on the wake of the coronavirus pandemic. Consequently, the
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global growth of domestic product is projected to slow down in the coming months as the virus

bites harder. The manufacturing industry is going to face a triple decline in the following areas;
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first, production will be slowed greatly by disruptions that arise from direct supply. The reason to

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3757421
 THE IMPACT OF CORONAVIRUS Volume 1 Issue 2

this is that the virus has greatly East Asia, which is the epicenter of the manufacturing industry,

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and then closing in to other industrialized countries like Germany and the United States. Second,

the supply-chain disruptions will increase the direct supply deficiencies. The deficiencies will

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occur because the manufacturing sectors in less-hit countries find it costly to acquire the essential

imported industrial inputs from the mostly affected countries.

Third, a major shift in demand will occur due to either macroeconomic decline in cumulative

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demand or the anticipated ‘wait-and-see’ buying delays by consumers and investment delays.

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Figure 2: Global GDP growth, 1995–2020. Source: UNCTAD (based on IMF, WEO, October 2019)
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The figure above shows the projected decline in the global Gross Domestic Product due to the

outbreak of Coronavirus disease. The reason to the slowing rate is due to the unilateral tariff
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policies of the United States actions, the dynamics of world’s foreign direct investment,

reduction in manufacturing activity as well as the sustained trade policy uncertainty that
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negatively affects investment and the demand for capital goods. The geopolitical tensions

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 THE IMPACT OF CORONAVIRUS Volume 1 Issue 2

especially between two giant economies, the U.S and China also plays a great role in the shaping

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the curve of global economy. The International Monetary Fund (IMF) projects that the ensuing

trade antagonisms between China and the U.S will overall slowdown the global GDP growth by

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0.8% by 2020 (Lea, 2019). With the already existing factors weighing down the global economy,

the COVID-19 pandemic will even add more weights to the world economy.

Disruption of demand, supply, and finance in the World Economy

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The Coronavirus pandemic is suppressing the demand for manufactured goods due to two main

reasons. First, the predisposition of consumption will slow down because employees who are

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mandated to stay home as they practise “social distancing” will opt to save more and spend less.

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Second, business enterprises facing challenges in the manufacturing process may down-scale

their use of intermediate goods. Disruptions in the forces of demand and supply can occur in a
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variety of ways in different nations and across different types of the industries.

The disparities within geographical regions of production could be manifested several ways.
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First, the Chinese, American and the European Economies are severely struck by the direct

influence of the health condition on their population. It is reasonable enough to assume countries
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that are rich in mineral elements such as oil and copper will face challenges due to reduction in

commodity, caused to strained global demand for such goods. The novel Corona virus has and
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will continue to hinder the main channels of the world economies in terms of demand, finance

and supply.
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In terms of demand, a reduced consolidation income and wariness of more transmission of the

virus will cause a declined low private spending. Although some of the resulting effects of the
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virus may be mitigated by the several government measures, the Corona virus shock’s gross

demand effect is estimated to be negative in the short term. The declining net demand could be

This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3757421
 THE IMPACT OF CORONAVIRUS Volume 1 Issue 2

augmented by a negative side effects of supply, which are witnessed owing to an unforeseen

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decline in production activities in the severely hit countries.

Also, the reduction in demand can be caused by the accrued obstacles in world value chains. If

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the issues are not addressed, the economic shifts may cause massive factory shutdowns due to

acute shortage of intermediary inputs, even in the regions that are less hit by the virus. Lastly, the

global economy will be threatened by the financial market stresses caused by the escalated risk

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revulsion and a flight-to-liquidity in the wake of the unforeseen situations caused by the

Coronavirus pandemic.

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Challenges in Global Value Chains
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As the world gears up to preventive mechanism for the virus, the global economy anticipates a
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major disruption in the international supply chains as well as the cumulative demand and

consumption behaviors. The change in turn will lead to a market turbulence and magnify the

economic shock. Small and medium-sized enterprises will have a rough road to brave the
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turbulence. Both travel and hospitality industries are set to face huge economic losses that will

take a long time to recover (Bachman, 2020.Countries that are most hit by the pandemic are great
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contributors to the world’s Gross Domestic Product, domestic production of goods and exports.

In addition, the different counteractive measures that many governments are introducing will
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cause a global decline in the aggregate demand. The supply chains in the global markets have

substantially changed how supply shocks propagate. While the people’s republic of China is
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economically the hardest hit, the last few weeks has seen an autonomous increase in infection

cases among the greatest economies such as the U.S, France, China, Germany, Japan, Germany,
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Britain, and Italy.

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 THE IMPACT OF CORONAVIRUS Volume 1 Issue 2

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Figure 3: Tabulation of Largest Economies and COVID-19 (updated 29th February 2020)

From the table above, the tabulation shows the giant contributors to the world Gross Domestic
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Product as well as the percentage of what they manufacture and export and the prevalence of the

pandemic. These countries are known to contribute to 60% of world’s Gross Domestic product, a

41% of global exports, as well as 65% of global manufacturing (Baldwin & Tomiura, 2020).
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From the table, China, the largest manufacturer has the highest number of COVID-19 infections
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as well as the resulting deaths. To combat the disease, we expect the government to implement

measures such as lockdowns, which will mean the industry will be shutting operations. Also,
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being the leading exporter, the global value chain will be disrupted completely. These great

economies especially China, U.S and Germany also have great influence on the global value
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chains, and therefore when they decline, they cause a consequential ‘supply-chain contagion’ in

all countries of the world.

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Decline in Global Shares

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The world economy anticipates big changes in the stock markets whereby the trade of shares in

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companies, can negatively influence a variety of capital investments in pensions or individual

person’s savings accounts. The Dow Jones Industrial Average, Financial Times Stock Exchange,

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and the Nikkei estimates sharp decline in the stock market shares since the onset of the virus on

31 December, 2019 (Brown, Palumbo & Jones, 2020). The Dow and the FTSE also expects a

one day decline since 1987. The figure below shows a sharp decline of equity markets at the end

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of February. The reason to the curve assuming greater Slope at the end if February is because the

virulence of the pandemic was rising.

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Consequently, there were more containment initiatives such as lockdown that further paralyzed.

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Contrary, from January to mid-February, the stock market faced small shifts because the

investors were yet to pull out of the market because business war normal.
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Figure 4: The influence of COVID-19 on Equity markets since January, 2020.

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Investors are adamant to invest their money on the wake of the coronavirus, and believes that it

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will hinder the rise in economy and several measures of interventions are not good enough to

remedy the worsening economy. In a counteractive manner, prime banks in many countries, such

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as Britain, have already scraped the rates of interest, to make borrowing less expensive and

unlock the power of increased spending to relive the economy. International markets also got

better after the US Senate approved a $2 trillion (£1.7tn) COVID-19 aid bill to assist employees

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and enterprises. Several economy experts warn that the situation of the world markets may

continue to deteriorate until the virus is tamed.

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In conclusion, the global economy is so much interconnected that a global pandemic such as the

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new novel COVID-19 is anticipated to make a major shift in the world economy. The deadly

respiratory disease is spreading to the world, facing business to shut down and government
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measures installed to counter off the virus. The economy expects increase in joblessness, as well

as decline in global shares, manufacturing capacity and rates of companies being defaulted. To
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rise above the adverse effects of the pandemic, there is a great need to consider both fiscal and

monetary policy measures that will seek to address the rising curve of the prevalence.
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