Impact of COVID-19 on Economy

Reading Time: 6 minutes


In almost all countries, crisis-response efforts are in full motion. A large
array of public-health interventions has been deployed. Healthcare systems
are—explicitly—on a war footing to increase their capacity of beds, supplies,
and trained workers. Efforts are under way to alleviate shortages of
much-needed medical supplies. Business-continuity and employee-safety plans
have been escalated, with remote work established as the default operating
mode. Many are dealing with acute slowdowns in their operations, while some
seek to accelerate to meet demand in critical areas spanning food, household
supplies, and paper goods. Educational institutions are moving online to
provide ongoing learning opportunities as physical classrooms shut down. This
is the stage on which leaders are currently focused.


 The pandemic has metastasized into a burgeoning crisis for the economy
and financial system. The acute pullback in economic activity, necessary to
protect public health, is simultaneously jeopardizing the economic well-being
of citizens and institutions. The rapid succession of liquidity and solvency
challenges hitting multiple industries is proving resistant to the efforts of
central banks and governments to keep the financial system functioning. 

A health crisis is turning into a financial crisis as uncertainty about the
size, duration, and shape of the decline in GDP and employment undermines what
remains of business confidence.


Returning businesses to operational health after a severe shutdown is extremely
challenging, as China is finding even as it slowly returns to work. Most
industries will need to reactivate their entire supply chain, even as the
differential scale and timing of the impact of coronavirus mean that global
supply chains face disruption in multiple geographies. The weakest point in the
chain will determine the success or otherwise of a return to rehiring,
training, and attaining previous levels of workforce productivity. Leaders must
therefore reassess their entire business system and plan for contingent actions
in order to return their business to effective production at pace and at scale.


A shock of this scale will create a discontinuous shift in the preferences and
expectations of individuals as citizens, as employees, and as consumers. These
shifts and their impact on how we live, how we work, and how we use technology
will emerge more clearly over the coming weeks and months. Institutions that
reinvent themselves to make the most of better insight and foresight, as
preferences evolve, will disproportionally succeed.

The crisis will reveal not just vulnerabilities but opportunities to improve
the performance of businesses. Leaders will need to reconsider which costs are
truly fixed versus variable, as the shutting down of huge swaths of production
sheds light on what is ultimately required versus nice to have. Decisions about
how far to flex operations without loss of efficiency will likewise be informed
by the experience of closing down much of global production.


The world now has a much sharper definition of what constitutes a black-swan
event. This shock will likely give way to a desire to restrict some factors
that helped make the coronavirus a global challenge, rather than a local issue
to be managed. Governments are likely to feel emboldened and supported by their
citizens to take a more active role in shaping economic activity. 

Policies on critical healthcare infrastructure, strategic reserves of key
supplies, and contingency production facilities for critical medical equipment
will all need to be addressed. Managers of the financial system and the
economy, having learned from the economically induced failures of the last
global financial crisis, must now contend with strengthening the system to
withstand acute and global exogenous shocks, such as this pandemic’s impact.
Educational institutions will need to consider modernizing to integrate
classroom and distance learning. The list goes on.

The aftermath of the pandemic will also provide an opportunity to learn from a
plethora of social innovations and experiments, ranging from working from home
to large-scale surveillance. 

With this will come an understanding of which
innovations, if adopted permanently, might provide substantial uplift to
economic and social welfare—and which would ultimately inhibit the broader betterment
of society, even if helpful in halting or limiting the spread of the virus.

While every single month, during the 12 months preceding September 2008, had
seen India’s merchandise exports grow by double digit percentage points from a
year-ago period, the Lehman bankruptcy saw the country’s exports drop
year-on-year every single month, during the following 12 months, sometimes by
as much as 34% from the corresponding month in the previous year.

It might make more sense to expect a stock-market
drop from a disease epidemic than from a recent earthquake, but maybe not a
crash of the magnitude seen recently. If it were widely believed that a
treatment could limit the intensity of the COVID-19 pandemic to a matter of
months, or even that the pandemic would last a year or two, that would suggest
that the stock-market risk is not so great for a long-term investor.

One could
buy, hold, and wait it out.

Business leaders need to
anticipate popularly supported changes to policies and regulations as society
seeks to avoid, mitigate, and preempt a future health crisis of the kind we are
experiencing today.In most economies, a healthcare system little changed since
its creation post–World War II will need to determine how to meet such a rapid
surge in patient volume, managing seamlessly across in-person and virtual care.
Public-health approaches, in an interconnected and highly mobile world, must
rethink the speed and global coordination with which they need to react. 

In the last half-century, at
least, it’s impossible to turn the history pages and find any parallel with the
economic, trade and commerce turmoil that COVID-19 has put the world in.
However, September 2008 provides some indications for what we might be headed
for. With the American investment banking giant 
Lehman Brothers’ bankruptcy freezing the financial world, the month saw
India’s trade go through a trend reversal that took years to undo.

If this doesn’t make the next few
months look worrisome enough, there are two factors that are only likely to
make matters worse. One, while going into the Lehman crisis, India’s exports
were on a rampage, growing in double digit percentage points year-on-year for
several years; in the present day, the country’s exports have barely budged
over the last five years. Secondly, while the financial crisis of 2008 affected
all countries at the same time, this time around, China is up and running when
we are just starting to shut down.

But a contagion of financial anxiety works
differently than a contagion of disease. It is fueled in part by people
noticing others’ lack of confidence, reflected in price declines, and others’
emotional reaction to the declines. A negative bubble in the stock market
occurs when people see prices falling, and, trying to discover why, start
amplifying stories that explain the decline. Then, prices fall on subsequent days,
and again and again.
This time, of course, is different. We see buyers’
panics at local grocery stores, in contrast to 1918, when wartime shortages
were regular occurrences. With the Great Recession just behind us, we certainly
are well aware of the possibility of major drops in asset prices. Instead of a
tragic world war, this time the US is preoccupied with its own political
polarization, and there are many angry narratives about the federal
government’s mishandling of the crisis. 
Predicting the stock market at a time like this is
hard. To do so well, we would have to predict the direct effects on the economy
of the COVID-19 pandemic, as well as all the real and psychological effects of
the pandemic of financial anxiety. The two are different, but inseparable.


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The structure of the economy has shifted over time to services, many of which involve face-to-face interactions. An abrupt uptake of voluntary and compulsory social-distancing practices brings a sharp drop in demand for such services. Again, there is merit in this explanation, but it also strikes us as insufficient on its own to explain the stock-market reaction.

That brings us to behavioral and policy reactions to the COVID-19 pandemic. As the economist says  “COVID-19 and the containment policies have directly and massively reduced the flow of labour to businesses. The result has been a sudden and massive reduction in the output of goods and services.” Voluntary adoption of social-distancing practices has also played a significant role. Current containment efforts are much more extensive and widespread than similar efforts in the past, including during the Spanish Flu,swine flu, Influenza, etc. 

 They also have more potent effects in the modern economy for reasons sketched above. In my view, the policy response to the COVID-19 pandemic provides the most compelling explanation for its unprecedented impact on the stock market.

The healthcare rationale for travel restrictions, social-distancing mandates, and other containment policies is clear. These policies also bring great economic damage. Recent stock-market behavior is an early and visible reflection of the (expected) damage.

Below are some of the finest articles to read
through to make a productive quarantine, if you haven’t yet. They will surely
expand your views of this pandemic situation and its impact on overall
Sources : World Economic Forum
   McKinsey Research Reports 

                 Verywell Wealth
    Spg global report 
    Economic Times
    The Hindu times
    Bloomberg Quint
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Shuchi Nahar

Shuchi Nahar

Shuchi is NISM Certified Equity Research Analyst, CFA - Level 1, a student of Law and Finance, and an aspiring CS.
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