By Zuhumnan Dapel
Had the world erupted in another World War, no nation would have been taken unawares nor will countries be utterly ill-equipped to cope with war challenges as they have been preparing – and probably some of their leaders ‘nostalgic’ for this– for decades: stocking-pilling firearms & building military capabilities.
But not so with the new and invincible enemy in town: Covid-19. It griped the world unexpectantly.
This enemy, that cannot be vanquished by military assaults, has thrown the entire globe into a tailspin, shaking healthcare systems and economies to their foundations, leaving them gasping for breath.
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Within months of the outbreak the virus has already blanketed the entire globe, moving at a lethal speed from one case (infecting one person) in one country to over 18 million cases in 216 countries, resulting in nearly 700,000 deaths across the world as of this writing.
Those numbers are expected to continue rising, with projections, for example, that up to 70 percent of Germans and 80 percent of the British population are at risk of infection. So far, thankfully, the numbers in Africa remain comparatively low.
As strange as the virus so are its twin effects: (i) choking humans lives & (ii) sucking the oxygen out of economies thereby causing severe & extensive damage to the means of livelihoods.
In addition to pre-existing devasting global challenges, the virus has ushered the world into two major new crises: a health crisis being driven by COVID-19 and an economic crisis riding on the back of the health crisis, such that as long as the health crisis keep moving, so will the economic crisis. That means until the health crisis is subdued, the world economy will remain in a bad shape.
As governments rush to combat the pandemic, given these staggering numbers, we must consider the economic impacts of the disease, which will likely linger long after the virus is defeated. Multilateral institutions, and other organizations worldwide are imposing travel bans and movement restrictions with the ultimate goal of containing the disease.
These policies, while well-intentioned, are inevitably proving deeply disruptive, slowing global economic activities, and ushering in steep stock and bond market declines across the globe. U.S. stocks already have suffered their worst losses since 1987 (exceeding even the 2008 financial crisis), and Britain’s FTSE 100 slipped nearly 10 percent, wiping £160 billion (equivalent to $198.2 billion) off shares of U.K.’s biggest companies since February. Recently revised growth projections show that all but three countries in the G20 will fall into recession this year. The global economy is predicted to shrink by 2.2 percent.
The CBOE Volatility Index (also known as the “Fear Index”), which measures the investor expectations of forward-looking volatility, suggests that turbulent economic times are ahead as well. Alan Blinder, former vice chairman of the Federal Reserve and current Princeton University professor, predicts that, since consumer spending is about 70 percent of U.S. gross domestic product, just a 5 percent decline in aggregate consumption would amount to 3.5 percent of the economy more broadly—meaning that drop would be more than enough to trigger a recession.
African economies will get hit, hard
It is not just the U.S. and Europe at risk. Although there are far fewer cases of the coronavirus in Africa, oil-exporting economies on the continent are already losing oil revenues due to shrinking demand from China and falling oil prices.
Falling oil prices, exacerbated by the remarkably ill-timed Russia Saud oil price war, are at their worst levels in 18 years. For instance, Nigeria, the leading producer of oil in Africa, could lose up $3.6 billion per month in oil revenue due to COVID-19 and the price war, as these have sunk the price of oil from roughly $67 a barrel to $20.
Given many of the African oil producers already are facing heavy debt burdens to China, European oil traders, and other lenders, this unexpected downturn will create even more pressure on the region’s already rapidly rising debt.
Iran and Italy—the first countries outside China to be hit hard by the virus—show what could be in store.
Both economies were not in good shape prior to the outbreak, Italy drowning in debt and Iran weighed down by international sanctions. If Africa becomes a COVID-19 hotbed, the scale of its economic and health impacts will be more devasting than is currently in the Global North and Europe.
The region’s health system is ill-equipped to manage the crisis and most of the economies are not in good financial shape.
Fiscal stimulus and rate cuts are on the rise. Will they help the situation?
In an attempt to reduce the likelihood of recession, major central banks around the world are loosening their monetary policies.
The United States Federal Reserve, the central banks of Canada, England, and Australia, the European Central Bank, and some Asian monetary authorities all have cut interest rates in recent months.
But will these efforts deliver relief in the face of combined supply and demand shocks? Cutting interest rates will not cut the spread of the virus, but they may help in keeping economies on life support until the COVID-19 virus settles.
Already, some African governments are responding: In addition to cutting interest rates, Africa’s biggest economy, Nigeria, slashed its gasoline pump price by 16 percent (but unfortunately for the consumers, this has recently been reverted) and lowered its exchange rate against the U.S. dollar. South Africa, the second-largest economy on the continent followed suit: Its policymakers have cut its key interest rate by 0.25 percentage points.
Many experts worry that most central banks do not have a lot of room to reduce rates further since those rates remain low more than a decade after the global financial crisis.
As a result, many African governments are moving to increase spending and cut taxes.
The power of these policies, though, are limited because the looming economic crisis is being triggered by a health crisis, which doctors and scientists must first tackle.
Moreover, while these interventions may put more money into the pockets of the public, movement-restricted consumers are unable to spend the extra dollars in the immediate future. Consumer spending on travel, holidays, restaurants, movie theatres, sports, other entertainment, etc., is being choked off.
We have been here before.
During the global financial crisis, the Obama administration designed a stimulus that shovelled $80 billion into the pockets of American households in tax rebates.
Households were expected to use this boost to aggregate demand through consumer spending. But a study by Martin Feldstein, a former Harvard professor and one-time Reagan administration chief economic adviser, found that only $11 billion of this amount was spent. In short, many people ended up saving more than they spent.
Will the economic impact of the virus outlive its health impact? When the Coronavirus eventually fades, its economic impact may linger longer.
Michael Clemens of the Centre for Global Development “points to a landmark study in the Journal of Political Economy, which found that in the census data of 1980, the negative economic effects of the 1918 influenza pandemic could still be found in the US.”
However, it is impossible to predict exactly when affected economies will stage a comeback and when share prices will exit the bear market. The 2007-2009 financial crisis lasted 17 months; this COVID-instigated crisis may last longer because the markets have already fallen to levels below that of the last financial crisis. Even if the spread of the virus recedes today and normal activities resume, markets and economies will still be at these devastatingly low points before rising again from the ruins.
Should we just try to ride out the storm? Yes. That’s part of it.
Not all is lost: Essential sectors (e.g. food, drugs, etc.) and some non-essential sectors (telecom, energy, etc.) of African economies are not shutdown since households still need things. Mercifully, these services are not affected by current lockdowns and restriction in movements, so neither will the consumption in these sectors.
However, money is still needed to pay for all of these bills. Since households, especially the self-employed—a very common situation in Africa—are now house-bound, they are unable to earn income.
Households that live paycheck-to-paycheck may run out of cash to pay bills. To cushion this impact, governments need to spend. Governments have been and are still spending, but, to give their economies the kick they needs, how those governments spend also matters.
African policymakers could look to policies being implemented in Europe and the Global North, where those leaders, in addition to paying up to 80 percent of salary of workers of workforce in their countries, suspending rent and utility bills for small business and cash transfers to households, are nudging firms to slam the breaks on household mortgage and credit card payments (but not utility bills) for three to four months, possibly, when the storm is over.
Easing the health crisis must be the first priority. Governments of affected countries should give their health experts whatever they ask for. The world will rise from the ashes of COVID-19, but it will never be the same again.
Dapel is a researcher at the Scottish Institute for Research in Economics in Edinburgh and a former IDRC fellow at the Center for Global Development