With COVID-19 unleashing devastation across the globe, around 170 countries and territories have registered over 140,000 confirmed cases as of 19 March, 2020. Many countries announced strict restrictions on immigration and air, sea and land travel among many nations have been suspended. Not only has the outbreak adversely affected global supply chains, but also has led to a shrink in worldwide demand side. Hit by this double whammy, the global economy might slip into a new round of recession, and globalization is facing systemic risks. Therefore, all economies should fully recognize the restructuring trend of global supply chain and make concerted efforts to cope with new recession.
The pandemic hits the economy from both sides of supply and demand. On the supply side, the outbreak has severely reduced its capacity. Many factories remain closed temporarily. Suspension of production has made importing countries short of raw materials, which in turn has affected the goods production in other countries. According to the updated report of United Nation Conference on Trade and Development (UNCTAD), a 2% output contraction in China has resulted in an estimated $50bn decreasing output around the world. On the other hand, as the epidemic spread globally, demand began to fall. A growing number of worried consumers are reluctant to shop, travel or eat out. Some companies are halting their hiring plans.
A typical recession normally leads to a shortage of demand relative to supply, in which case, policy makers know how to fill the gap. But the current situation is more complicated since the outbreak has put negative impacts on both sides.
A new round of global recession is looming. It might be too early to predict the impact of COVID-19 on the economy, which depends on the preventing measures and the real-time changes of value chains. However, it is hard to ignore that a new round of global recession is looming. For starters, the next recession is likely to emanate from some counties most hit by the pandemic, and indeed may already be under way. They cannot afford a sustained pause today anymore. People, businesses and governments need funds to pay back their out-size debts. Sharply adverse demographics and negative effects from recurrent stimulus programs already presage slower growth for the emerging economies in the next decade.
Equally, advanced economies cannot be immunized in this disaster. The global growth in 2019 was just 2.9%, not far off the 2.5% recorded in recessions. Before the outbreak, the Italian economy was just beginning to recover. Japan's economy is already in recession after an ill-timed increase in the consumption tax. Germany's economy is teetering in political chaos. The US economy seems to be good, but previous forecasts put the recession chance before November's presidential election at 15%, which now looks much higher. Moreover, unlike the two previous global recessions, this century driven by demand shortfall, a supply fracture triggered by COVID-19 could result in sharp declines in production and widespread bottlenecks. In that case, generalized shortages could ultimately push inflation up. Rising inflation could prop up interest rates and challenge both monetary and fiscal policy makers.
In some countries, most of the intervention effort has been directed towards calming financial markets. On 3rd March, America's Federal Reserve cut rates by an unusually large 0.5%. The central banks of Australia, Canada, Indonesia, and the bank of England have followed suit. Lower rates will ease borrowing costs and shore up sentiment, but no amount of cheap credit can stop people falling ill. Monetary policy cannot repair broken supply chains or tempt anxious people into venturing out.
Economic globalization to be challenged by systemic risk: The rapid spread of COVID-19 around the world also reflects the systematic risks brought by globalization. With the world increasingly interdependent, cross-border travel and trade generated great income and wealth, but also facilitated the spread of diseases. Large hub airports are "super communicators" of globalization advantages as well as disadvantages.
The stability of economic globalization system will hinge on its weakest part. Unlike the threats from cyberspace, financial systems and climate change which could be decreased by the actions of a few countries, pandemics can originate anywhere in the world. Therefore, the ability to isolate outbreaks through control, prevention and intervention is most critical, especially in poor countries. Countries need to share resource and fight together to reduce systematic risk inherent in health care system as well as the economy.
How should the world reconstruct the global supply chain to cope with COVID-2019: Due to the outbreak of the pandemic, multinational companies have been "awakened" and reflect on their dependence on the Chinese supply chains. Restructuring the global supply chains is inevitable, it is rather a matter of time and magnitude. Updated data shows that at least 30-40% of foreign businesses are likely to pull their supply chains out of China. If the trade dispute might forced multinationals to find alternative suppliers, COVID19 undoubtedly speed up the process. Overall, the aim of supply chain restructuring is not to target China, but to spread the risk globally.
But most economists stressed that China's supply chains cannot be completely replaced because of the following factors: Firstly, China has a more complete industrial system than any other country. It is the only country hosting all the categories listed in the UN industrial classification. Secondly, China cultivates a high level of technology and labor in certain industries, which cannot be replicated by the low-wage countries in Southeast Asia. Thirdly, the huge domestic market demand will keep supply chains in China. Those business oriented to "made in and only for China" still prefer to stay in China. In this trend, if China timely upgrades domestic industries and thus promotes transforming domestic consumption as well as diversifies the deployment of supply chains, its overall strength and development potential will reach a even higher level after getting through the current crisis.
For other countries, especially the developed ones, easier fiscal and monetary policies are certainly on the way. But experience tells us not to use all the tools at once, rather make more flexible policies to support the economy directly, by helping affected people and businesses to pay bills and their ability to borrow money should be taken into account. For individuals, the priority should be paying for health care and providing paid sick leave, both to boost spending and to reassure people.
Walls cannot fend off the spread of pandemics. Similarly, acting alone is bound to be costly. Concerted international action against the pandemic is the only hope.
(The writer is consul general of China in Karachi)