THE ECONOMIC IMPACT OF COVID-19

After over 22 days of confinement, we would like to share a study from the consultant Deloitte on the economic effects of Covid-19 and the possible global scenarios in function of the virus’s progression. It is just as important to be optimistic as realistic.

Dorsan®, as an essential service company, working every day of the lockdown with the usual filtration product service and supplies.

Beyond its impact on the lives of millions of people all over the world, the new coronavirus pandemic has also dealt a heavy blow to economic growth on a global level. Although the governments of the main countries to be shaken by the Covid-19 crisis have launched measures to palliate the economic slowdown caused by this virus, it is foreseen that its spread could have a triple effect on the global economy: direct impact on global production volumes; disruptions and disorder in supply and distribution chains; and financial impact on companies and the stock market.

 

DIRECT IMPACT ON GLOBAL PRODUCTION

Chinese production has already been substantially affected by the closure of industries in the province of Hubei and other key areas for Chinese component exports. In consequence, the Chinese slowdown has had an imminent collateral effect on the production levels of this country’s main importers: the United States, Hong Kong, Korea and Japan.

Simultaneously, the expansion in the spread of coronavirus has meant that the direct impact on production levels has also been felt with great virulence in the rest of the Asian continent and in the major countries of Europe and North America.

 

INTERRUPTIONS IN SUPPLY AND DISTRIBUTION CHAINS

Numerous producers and manufacturers of consumer goods depend on components and pieces imported from China and other Asian countries affected by the pandemic.  In addition, many companies also depend on sales in China to reach their financial targets.

Thus, it is predicted that the slowdown in economic activity and the transport restrictions in countries affected by coronavirus will have repercussions in the production and profits of certain global companies. Mainly, of those which make up the manufacturing sector and those which are involved in the procurement of raw materials used in the production of consumer goods.

In the case of companies which depend on intermediate components from affected regions and which cannot easily change their supply sources, the magnitude of the impact may depend on the duration of lockdown measures. In this scenario, small and medium-sized businesses will have the most trouble surviving the disruption caused by coronavirus.

The situation may be particularly dramatic for companies linked to the tourism sector, who have found themselves with limited room to manoeuvre due to the restrictions put in place by governments around the world to stop the spread of coronavirus. The sector predicts that its companies will face losses which will probably be impossible to recover.

 

FINANCIAL REPERCUSSIONS IN COMPANIES

The temporary disruptions in the production of goods and components could put a strain on some companies, particularly on companies with insufficient solvency. The impact on the markets will materialize itself as negative assessments and an increase in risk. In turn, the consequent increase in risk will be translated into investment positions that will be unprofitable under the current conditions, which will weaken the trust in financial markets and instruments even further.

One possible event derived from the previous affirmation would be a significant disruption in the stock market as concerns about counterparty risk continue to rise. After that, a more than likely possibility would be a significant reduction in stock prices and corporate bonds, since investors would prefer to maintain the government values (in particular those of the United States Treasury) due to the uncertainty created by the pandemic.

 

POSSIBLE ECONOMIC SCENARIOS DEPENDING ON CORONAVIRUS SPREAD AND ON WHEN THE PANDEMIC IS CONTROLLED

In the face of the financial effects that the worldwide spread of the pandemic is already generating, there are three possible scenarios on the impact it could have on the economy, depending on how quickly the spread of the virus is controlled and how quickly the pre-Covid-19 situation is returned to.

• Scenario 1. The year of coronavirus. Although the spread of the disease in China will have slowed, outbreaks of new positives would continue to occur throughout the world. Each outbreak would necessitate a slowdown in production in this zone. In a globalised world, this would imply a series of interruptions in production in different regions and industries as outbreaks are produced and controlled. As a result, there would be a large enough disruption in economic activity to considerably decelerate global economic growth. In this scenario, a competitive advantage would be had by any company agile enough to manage a change in suppliers and, in parallel, by the companies with enough liquidity to survive drastic reductions in sales and revenue.

• Scenario 2. The cost of a global response to coronavirus. Economic centres around the world would be subject to closures like the one in Wuhan, while the global population would start to panic from the virus’s spread. The uncoordinated decisions of each country would interrupt the movement of people, goods and commodities.
A descent in production levels would occur as a result, since businesses with international supply chains would only be able to operate in an intermittent way. Tourism, as well as any companies and regions dependent on this sector, would find themselves heavily affected and their revenue intake would drastically diminish.

In this scenario, it would take the World Health Organisation and the United Nations over a year to design a global response that prioritises cost-effective health measures in a way that meets the approval of the world’s main economies.
With all that, the global GDP would stagnate and international commerce would drop, which would imply the beginning of a global economic recession.

• Scenario 3. Financial system crisis. Delays in shipments and production schedules would generate financial problems for companies with large amounts of debt, especially in the United States. The stock market downturn and the increasing risk-aversion of investors, who would sell assets like high-yield bonds and volatile shares, would make investors who underestimate risk more vulnerable.

As a result, concerns about counterparty risk would reduce the liquidity of financial markets to the maximum. A recession would thus be produced and central banks would have to enact coordinated measures to handle the situation. Through the implementation of stimulus policies, financial markets — and the global economy — would begin to recover after a V-shaped recession.

Source: https://www2.deloitte.com