International Economy in the Midst of the Novel Coronavirus: An Analysis of the Most Affected Sectors

INTRODUCTION

The best and the worst thing about the coronavirus is that it does not discriminate between people on the basis of race, religion, caste, creed, and most importantly economic status, since almost everyone all over the world has been affected very badly by this pandemic. With people losing their jobs, businesses shutting down and friction in the world supply chains, there has been growing unsteadiness that seems hard to master. The scope of this article will be to assess the impacts that this pandemic has introduced on the international economy and how technology has emerged as a very useful tool in this time of crisis.

The International Monetary Fund has in its statement declared that the global economy may shrink up to 3 per cent due to this pandemic[1]. While the advanced economies can try and fight the economic effects of this virus to an extent with significant declines in their GDP, it is extremely difficult for the developing economies to do the same as most of their workforce belongs to the unorganized sector without access to adequate healthcare and social protection.[2] Due to the spread of the pandemic, a majority of the industries have witnessed its negative impacts. But there are some industries which have been impacted more severely by this slump all across the world.

CRUDE OIL INDUSTRY

Amid this pandemic, where the production sector has taken a step back, it is the fossil fuel industry which is bearing the brunt as there has been a significant decline in the demand for fuels. Among those most affected is the crude oil industry because transportation is at an all-time low. The oil industry today holds a significant share in the world economy. The crude oil industry has also become a strategic resource for several countries. According to the forecasts by the International Energy Agency, the demand for oil in 2020 was expected to grow at a rate of 825,000 barrels a day with a yearly total of 99.9 million barrels. This has now fallen to an annual demand of only 90,000 barrels.[3] This has not only caused turbulence in global trade but has also made matters worse for several economies. It has led to falling of oil prices, creating problems for investors as the return rates have fallen from a regular 20% to a steep low of 6%.[4] This comes with accompanying issues of lowered production and laying off of workers, leading to unemployment. A major reason behind this is the oversupply coupled with reduced oil demand. The Middle-eastern countries, along with Latin American and African countries, have faced a major setback as their economies are sustained by crude oil, unlike the more diverse economies. But a big relief from this crisis could be the OPEC plus deal signed by over twenty countries led by Russia and Saudi Arabia. This deal sets a floor price for the oil to sustain their economies by cutting back on production. But it may not turn out to be a complete cure as the deal requires them to cut 15 million barrels of production while the demand has dropped by 30 million barrels.[5]

AVIATION INDUSTRY

Travel restrictions during the current lockdown have caused huge losses to the global aviation industry. Governments worldwide have declared travel bans leading to falling in demand of the industry’s services and cancellation of flights, huge economic losses and in some cases laying off of employees. Problems were also faced by the consumers who had already booked their flights in advance. These problems led to several individuals as well as the aviation companies to face huge losses. Governments all over the world came to rescue for these individuals. The US along with many European countries mandated for the airlines to refund passengers for the cancellation of flights, but to save themselves, the companies went for offering those passengers vouchers and travel credits which can be used at the end of the year. The only hope for the industry lies in cargo shipments as it is not prohibited per se. Soon after the cancellation of passenger flights, the prices of cargo shipments rose by 3 times, giving a slight relief to the companies. Huge shipments of pharmaceuticals also played their role in minimising losses for them and this gave the aviation industry a slight relief. The International Air Transport Association had mentioned in its statement that the airline industry can face losses ranging from 63 billion USD to 113 billion USD.[6] which is a very huge number for this industry. To fight against this crisis many airlines have decided to go for corporate consolidation as a temporary solution[7]. As they have found working together as the most plausible option in this crisis. As with corporate consolidation, the airlines may save themselves from huge losses which they might face while dealing with this crisis individually Where consolidation might work for some big airlines, others are in dire need of government bailouts to keep them from going bankrupt.

HOSPITALITY INDUSTRY

 If the manufacturing sector is finding it hard to stay afloat, the service sector is drowning.  With the closing down of restaurants and cinema halls, tourism and hotels struggling to maintain their occupancies, huge economic losses and unemployment do not look unfamiliar for the near future. The reason why the service sector is more likely to bear the brunt of the highest losses is because of the nature of its work to deal directly with the public. Among these industries, it is the tourism industry that is going to be most gravely affected by this lockdown. The World Travel and Tourism Council declared in its earlier statement that if this situation continues, an estimated global loss of 2.1 trillion USD along with 75 million people facing unemployment is likely to happen.[8] With a huge global loss of the industry at a global level, the US is at the centre of it facing a big turnback. Roger Dow, the CEO and the President of the US Travel Association has recently stated that the net impact of this crisis is going to be 6 to 7 times worse than that of the 9/11 attacks or the global financial crisis faced by the country nearly a decade ago. To deal with the situation, Congress has passed a proposal for an aid package of 2 trillion USD.[9] The hotel industry all over the world is also facing a similar crisis. The RevPAR (revenue per available room) in China, during the first week of March, fell to over 85%. The picture in Europe and the US is more or less similar. At 44% in Europe and 69.5% in the US during the first week of March, the RevPAR percentage has even down[10]. he RevPAR in the US has seen a steep decline to 80.3%[11]. In India, the hospitality industry is estimated to face a loss of 620 cr. Rupees. In such a situation, lay-offs are most likely to happen, rendering around 3.8 crore people jobless in the hospitality sector which is around 70% of all its employees.[12]

BANKING SECTOR

With a huge setback in the economy, it is the banking sector which stands at the forefront to take most of the bullets. Due to lockdown, it has become really difficult for banks to maintain good assets and ensure profitable earnings. Investors have made their way out of banks as they have started losing their confidence in the global financial system, leading to a decline in shares[13]. However, it is important to note that the negative impacts on the banking sector have not been as severe as they were during the global financial crisis. This is major because of two reasons. Firstly, banks at that time were the reason why the crisis happened in the first place. Secondly, banks in the present-day economy are well developed and properly structured institutions that have accumulated enough wealth to use as a safety net during such a crisis. But the picture is a little different in the European economy. To continue sustaining the economy, central banks have exhausted their resources through measures such as quantitative easing and lowering of negative interest rates. The European banks have waived off the fee, increased the credit card limits and granted payment mortgage holidays to ensure the customer that they have his back[14]. A similar crisis is prevalent here in India. The banks are likely to face a situation which leads to a spike of 1.9% in the ratio of non- performing assets and credit cost ratios by 130 basis points. RBI has reduced the repo rate by 75 base points and increased the limit for a marginal standing facility to 3 per cent to extend the facility of granting loans[15]. The banking sector of the United States, on the other hand, is ready to withstand the impacts of this crisis as most of the banks consider themselves to be in a position to cope up with the slowdown in the economy. This came up when The Federal Reserves announced a 700 billion USD quantitative easing scheme to invest in the treasury bonds of the US and the mortgage-backed securities. And these banks are ready to provide mortgage repayment holidays to the customers[16].

TECHNOLOGY TO THE ULTIMATE RESCUE

At a time when people are losing their jobs, huge losses have been in businesses, and the economy is going through its worst phase, technology finds itself as a ray of hope. Online conferences, board meetings and online classes for students have shown that in such adverse times as far as the economy is concerned, it doesn’t necessarily have to be in stagnation. Businesses and corporations are still functioning through online modes and platforms. Not only this, but people also have found the concept of work from home a very comfortable and a feasible option as it doesn’t necessarily require one to be present at the field to get the job done unlike other service-specific jobs such as those of pilots, air attendants, waiters etc. who have faced the downside of this lockdown. Jobs such as those in the IT sector, consultancy and legal services have not faced any major setback as they have continued doing their work by embracing the work from home culture. Several of the tech giants have been running their businesses regularly by keeping the managers and officials in touch with their staff. For example, there has been an incredible rise 200% in the no. of zoom minutes meeting for the Microsoft officials from 900 million minutes in a day to 2.7 billion minutes[17]. This has certainly saved many employees from losing their jobs, but because many of the people do not have adequate access to technology and internet connectivity, technology has to be more inclusive.

CONCLUSION

With the global economy facing huge troubles to maintain growth during the lockdown, it becomes really important to take the next step very carefully. Several of the important and strategic sectors have been facing an all-time low. And in such times, it has become really difficult for the government to support the industries along with the poor and the underprivileged at the same time. There are predictions regarding the economy taking a ‘V’ shape growth curve, but nothing has been proved as the cases still keep on increasing every day. Hence, maintaining a low level of growth and continuing certain essential business activity with technology taking the major role ahead can be the most viable solution to fight this pandemic.

Opinion expressed by the authors are personal.


[1] David Lawder, Coronavirus ‘Great Lockdown’ to shrink global economy by 3% in 2020 -IMF, Reuters (April 14, 2020, 6:01 pm), https://www.reuters.com/article/imf-worldbank-outlook/coronavirus-great-lockdown-to-shrink-global-economy-by-3-in-2020-imf-idUSW1N2A401A

[2] ILO: COVID-19 causes devastating losses in working hours and employment, International Labour Organization (April 7, 2020), https://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_740893/lang–en/index.htm

[3] Global oil demand to decline in 2020 as coronavirus weighs heavily on markets, IEA News (March 9, 2020) https://www.iea.org/news/global-oil-demand-to-decline-in-2020-as-coronavirus-weighs-heavily-on-markets

[4] Will the coronavirus kill the oil industry and help save the climate?, The Guardian (April 1, 2020, 7:00 pm),  https://www.theguardian.com/environment/2020/apr/01/the-fossil-fuel-industry-is-broken-will-a-cleaner-climate-be-the-result

[5] Indrani Bagchi, Falling oil prices amid coronavirus pandemic: What it means for India and other players, Economic Times (April 25, 2020, 11:35 pm), https://economictimes.indiatimes.com/industry/energy/oil-gas/falling-oil-prices-amid-coronavirus-pandemic-what-it-means-for-india-and-other-players/articleshow/75382823.cms?from=mdr

[6] Ben Doherty, Qantas slashes flights as coronavirus hits passenger numbers, The Guardian (March 9, 2020, 11:40), https://www.theguardian.com/business/2020/mar/10/qantas-slashes-flights-as-coronavirus-hits-passenger-numbers

[7] Laurence Frost, Coronavirus to drive European airline industry shakeout, Reuters (March 9, 2020, 7:51 pm),  https://www.reuters.com/article/us-health-coronavirus-europe-airlines-an/coronavirus-to-drive-european-airline-industry-shakeout-idUSKBN20W1Z4

[8] Elizabeth Becker, How hard will the coronavirus hit the travel industry?, National Geographic (April2, 2020) https://www.nationalgeographic.com/travel/2020/04/how-coronavirus-is-impacting-the-travel-industry/

[9] Id, para 2.

[10] Mitra Sorrells, Data shows severe impact of coronavirus on global hospitality industry, Phocus Wire (March 26,2020 ) https://www.phocuswire.com/str-global-hotel-data-march-21-coronavirus

[11] Economics in the time of Covid-19, VOX CEPR Policy Portal (May 4, 2020)https://www.hotelmanagement.net/own/str-u-s-revpar-down-80-3-china-improves

[12] Coronavirus impact may render 3.8 crore people jobless in tourism, hospitality sector, Economic Times (March 19, 2020, 3:23 pm) https://economictimes.indiatimes.com/jobs/coronavirus-impact-may-render-3-8-crore-people-jobless-in-tourism-hospitality-sector/articleshow/74709878.cms

[13] Impact of COVID-19: Taking a toll on global banking system, Economic Times (March 24, 2020, 2:53 pm), https://bfsi.economictimes.indiatimes.com/news/banking/impact-of-covid-19-taking-a-toll-on-global-banking-system/74790951

[14] Thomas Zink and Martin Stiller, COVID-19 and its Impact on the Banking Industry, IDC, analyze the future (March 26, 2020),  https://blog-idcuk.com/covid-19-impact-banking-industry/

[15] Covid-19 Impact: Banks to witness spike in credit costs, non-performing assets in 2020, Economic Times (April 6, 2020, 12:06 pm), https://economictimes.indiatimes.com/industry/banking/finance/banking/covid-19-impact-banks-to-witness-spike-in-credit-costs-non-performing-assets-in-2020/articleshow/75004720.cms

[16] Peter Lee, Can technology withstand the impact of Covid- 19?, Euromoney (March 27, 2020), https://www.euromoney.com/article/b1kxrvx42r38r6/can-banks-withstand-the-impact-of-covid-19

[17] Enda Curran, World Economy Working From Home Gets a Glimpse of the Virtual Future, Bloomberg (April 15, 2020, 2:30 pm ),   https://www.bloombergquint.com/technology/world-economy-working-from-home-gets-glimpse-of-virtual-future

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