An Economic Recession Looms: The Aftermath of COVID-19

By Adriana Albares Infante

COVID-19 has the global order shivering. The viral respiratory illness, also known as Coronavirus, began spreading in China late last year. Since then, the virus accounts for over 440.000 cases and 19.000 deaths. Governments worldwide are enacting national lockdowns. All schools, universities and most corporations have closed down, leaving only the food industry and pharmacies open. Although China’s situation is improving, Europe and America are months behind. Last Monday alone, Spain and Italy flooded hospitals with over 400 new cases respectively, oversaturating hospitals. Unfortunately, they are just an example. In short, COVID-19 is posing a serious threat to the collapse of both the healthcare system and the economy. A major health emergency has arrived, but what does this mean for the global economy? With the majority of businesses on lockdown, the global economy is in turbulent waters. 

Overall, the economic aftermath of COVID-19 has two possible outcomes: a global slowdown or a pandemic driven recession. This has been measured through two interlinked metrics. First, the seasonality of the virus and second, the length of national lockdowns. One thing is for sure, Europe is most vulnerable.  

The first possibility entails a global economic slowdown. This option assumes that COVID-19 is seasonal, meaning the virus would begin to cease as warmer temperatures arrive. In result, companies would return to daily functions around mid-May/June (which is most probable). Still, the global economic lockdown exceeds early estimates, reaching six-eight weeks and causing severe economic damage to the global economy. Due to these same national lockdowns, businesses working on thin capital margins would undergo temporary, yet decisive cash crunches. An estimate of 10-15% of corporations would face major liquidity issues. Hence, thousands could be left unemployed after budget cuts aimed at rising capital margins are introduced. Simultaneously, a shock in demand would decrease global GDP by 1-1.5% on average, affecting lower and middle-class income households most. Any attempts to use corporate bonds would be insufficient. This is because they require regular payments and specific contracts, both of which are unattainable after a lengthy economic slowdown. In response, governments would be forced to heavily intervene. The most helpful measures would include tax breaks and credit injections to corporations. The bottom line would be for companies to have sufficient liquidity to stay afloat, thus preventing the collapse of the economy. The problem is that possible solutions like credit injections depend on bank ownership. China, for example, grew by 11% this past February even after the outbreak of COVID-19. This is because banks are state-owned and injected all necessary capital into companies, as commanded by the government. Both Europe and America are a different scenario, banks are privately owned. This complicates possible solutions, especially for Europe. European banks, unlike their American counterparts, function on thin profit line margins, primarily due to low-interest rates. This limits the incentives of European banks to do as the government says. Already, share prices of Italian examples like Intesa SanPaolo or Unicredit have fallen by 24% and 40% respectively (last updated: March 18th). An economic crisis, therefore, seems inevitable. Still, after serious government intervention and global cooperation, the economy would recover. Consumer demand and confidence would also return, but Europe would suffer the worst consequences. 

The second and worse possibility is a pandemic driven economic recession. The only difference to the global slowdown possibility is that it assumes that COVID-19 is not seasonal. Instead, cases continue to increase regardless of warmer temperatures. This would result in an indefinite extension of national lockdowns worldwide, collapsing both the healthcare system and the economy. Additionally, due to Chinese factory closedowns earlier in the year, supply chain processes would be critically interrupted (it must be noted that supply chain interruptions will equally affect the first possibility). A combination of delays and shortages in supply due to extended national lockdowns, would leave the global economy in recession for months. The extent of the damage remains uncertain, yet hundreds of thousands would be left unemployed. It is estimated that within three months of lockdown, 13% of companies would declare bankruptcy. By six months’ time, the figure would be expected to rise to 1⁄4 of global companies. This would trigger an overwhelming wave of long-term borrowing, pressuring both banks and governments to limits beyond calculation. Overall, global growth would decline approximately by -1.5%, once again, affecting lower and middle-income households most. 

In conclusion, it is difficult to provide a precise verdict on the economic aftermath of COVID-19. Daily changing conditions of the virus and what it imposes, subject governments to divergent measures which are challenging to predict. Nonetheless, the global economy should prepare for new and certain economic obstacles. Governments worldwide need to cooperate to establish a long-term cross-functional COVID-19 response team. Spain and Italy should serve as examples of the need to efficiently handle these critical situations. Governments must ensure that employees are protected, liquidity is sufficient and supply chain processes are altered as little as possible. If not, COVID-19 might not only pose as an economic adversary, but a political one too. 

Edited by Gunvir Paintal

Artwork by Oscar Laviolette