The economic impact of COVID-19

The virus, referred to as SARS-CoV-2, causes a disease that has been officially named COVID-19. On March 11, 2020, the Director General of the World Health Organization (WHO) declared COVID-19 a global pandemic. China has since managed to contain the virus through the use of draconian measures. However, Western Europe continues to grapple with severe outbreaks, while as of 6 April 2020 the United States (US) has over 330,000 cases, more than any other country. In New York City, the hardest hit state in the US, hospitals are barely coping with the soaring numbers of patients as supplies of personal protective equipment (PPE), ventilators and other essential equipment needed to treat patients are in short supply. On April 6, there were 1,275,856 confirmed cases and almost 70,000 deaths due to COVID-19 in 183 countries or regions globally. Given that testing rates have been poor in many countries, the true number of cases is likely to be much higher. As the virus continues to make its way around the world, the potential health impact of the pandemic in low-income countries, particularly in Africa, that already face struggling health care systems and a scarcity of skilled health workers, is of grave concern. While the pathogen’s epidemiological trajectory remains uncertain; various mathematical modelers have attempted to estimate the potential health impact of the disease. Their estimates range from 20% to 80% of the global population being infected.

There are currently no commercially available pharmaceutical interventions or vaccines to prevent infection, treat the disease or curb the pandemic. Countries are relying on behaviour change and non-pharmaceutical interventions, including, amongst others, self-isolation of symptomatic individuals; increased hand hygiene; physical distancing; working from home where possible; and school and business closure. National and local governments have closed their borders, restricting the movement of people in an attempt to contain the spread of the disease and to flatten the peak of the epidemic, with the aim of reducing the daily demand on health care resources. In the US, citizens of 40 states, along with a number of cities and counties, have been advised to stay home, while on 24 March, 1.3 billion people in India were placed under a nationwide ‘lockdown’ for 21 days.

The economic fallout from this pandemic is likely to cripple even the most resilient of markets, threatening national and global growth. Although the pathogen has not yet completed its world tour, the global economy is already showing signs of slowing down. Service sectors, including aviation, travel, and tourism, are being hit the hardest. Business activity has ground to a halt in many sectors. Airlines have already experienced a steep fall in traffic on their highest-profit international routes. In the US, almost 6.6 million workers filed for unemployment benefits at the end of March, ending a decade-long streak of employment growth. More than 60% of Americans have lost hours or pay, been laid off, or closed a business in response to the pandemic, with predictions that the US jobless rate could reach as much as 30% in the second quarter. The British Chambers of Commerce revealed that by early April, 32% of businesses in the United Kingdom will have temporarily laid-off staff. In many low-income countries, the informal sector is a substantial source of employment. In many of these workers, out-of-pocket expenditure for health care already comprises a large proportion of household incomes. Increased demands on families are likely to push them further into poverty. The Organization for Economic Co-operation and Development (OECD) predicts that some countries could be dealing with the economic fallout of the COVID-19 pandemic for years to come.

The true cost of COVID-19 will therefore be far greater than the direct health costs of treating cases. Indeed, the indirect costs of the disease will far outstrip the costs of testing, treating and hospitalization of patients. The extent of these indirect costs, including the economic damage, will depend on how protracted the pandemic becomes, the steps governments take to contain it, the impact of and public adherence to behavioural measures such as physical distancing imposed by authorities, and how much economic support governments and development agencies are willing to deploy during the pandemic’s immediate impact and aftermath. The availability of effective treatments and vaccines, as well as new diagnostic tests, will also determine the level of non-pharmaceutical interventions (NPIs) that will need to be retained. Additionally, the potential mitigating effect of heat and humidity is likely to have a bearing on the seasonality of epidemics. Some experts have warned of a second wave of the pandemic in the autumn, similar to what was observed during the 1918 Spanish flu pandemic. Indeed, Singapore has already reported an upsurge in new cases triggering a second lockdown.

The readiness of health care systems to navigate potential recurrence will require widespread testing, real-time surveillance, rigorous contact tracing, and rapid, targeted quarantining to isolate cases and contacts (as was done in South Korea, Singapore and Taiwan) and will influence any resulting economic shocks.

In this brief, we outline the direct and indirect costs of the COVID-19 pandemic which may impact the global economy. For the purposes of discussion, the indirect impacts have been broken down to supply and demand shock, however, the various sectors, agents and markets in the economy are interdependent and will have knock-on effects on one another. Short term impacts will lead to a loss of wages and capital flows which may lead to more systemic long-term effects changes.

Direct costs

Direct costs include the cost of testing and contact tracing, in addition to the costs of hospitalisation, intensive medical care, control interventions for managing the disease, and the salaries of health care workers. They will also include the cost of vaccines, treatments, rapid diagnostic tests and antibody tests, if and when they become available. The true direct costs would also include the costs of research and development of new therapies and vaccines, although assigning a value to these may be challenging. Direct costs also include out-of-pocket (OOP) expenditure. In low and middle-income countries, this may comprise up to 50% of all health expenditure if governments do not make provisions for free testing and treatment for patients with COVID-19. OOP expenditure includes the costs of transport to/from hospitals for testing and treatment and other expenditures such as the cost of protection measures that households/businesses would not otherwise have spent money on, for example purchasing hand sanitizer and disinfectants.

Indirect costs

Indirect costs are all of the additional costs associated with either being ill or the economic impact of behaviours adopted to avoid becoming infected. They incorporate productivity losses arising from worker absenteeism due to morbidity and mortality, including the loss of wages as well as opportunity costs. They also include spillover effects on the economy from aversion interventions that are either government or self-imposed to avoid exposure to the virus. The outcome of these effects induce both supply and demand shocks. Supply shocks arise from the closure of businesses, hotels, restaurants and other businesses that are deemed “non-essential”. Demand shocks result from decreased consumption, travel, transport and other unnecessary expenditures. Each of these are discussed separately below.

Supply shocks

Manufacturing and production

Production in China was substantially affected by the government-imposed shutdown in Hubei province and other areas. Hubei province plays a major role in the Chinese economy, as the largest transportation hub in central China and a significant industrial base that includes a mixture of traditional and hi-tech sectors, such as automobile manufacture, food processing, electronics equipment manufacturing, textile factories, and petrochemical industries, as well as iron and steel production. Many manufacturing firms around the world rely on imported intermediate products from China and other countries affected by the disease. For example, some car manufacturers, including Nissan and Hyundai, temporarily closed their factories outside of China because they were unable to get the parts they needed.

The slowdown in economic activity—and transportation restrictions—in affected countries will have an impact on the production and profitability of specific global companies, particularly those involved in manufacturing or in producing the raw materials used in manufacturing. Small and medium-sized firms, especially firms that rely on intermediate goods from affected regions and which are unable to easily switch sourcing these goods, may have greater difficulty surviving the disruption. Returning businesses to operational health after such a severe shutdown will be extremely challenging, with most industries needing to reactivate their entire supply chain.

Supply chain disruption

Businesses around the world are dealing with lost revenue and disrupted supply chains due to China’s factory shutdowns. China has become the primary source of many crucial medical drugs, including penicillin, heparin, and medications essential for surgery. Up to 80% of the world’s basic ingredients for manufacturing antibiotics are produced in China. The US pharmaceutical industry reported fears of drug shortages as India faced lockdowns on 24 March. India is the world’s leading producer of high-volumes of sterile injectable drugs, supplying almost half of the generic drugs used in countries such as the US. On 27 February, the US Food and Drug Administration (FDA) released a statement saying the US was experiencing its first drug shortage directly related to the COVID-19 pandemic. These stockouts can leave many people without the essential medicines they need.

At the same time, supply chains have been experiencing systemic demand shocks. The shortage of masks, gloves and other personal protective equipment, in addition to shortages in the numbers of ventilators, has been well documented. On top of this, some individuals have been stocking up on groceries and household items in preparation for compliance with restrictions on movement, in some cases buying several months’ worth of goods in a single day, particularly if they begin to see shelves with low levels of stock. A classic example of this is hygiene products, such as toilet paper, hand sanitizers and surface disinfectants, which have seen sudden spikes in demand, leading to panic buying and stock-out situations. The shortages are compounded by the scarcity of air and ocean freight options to move products, hence lead times have doubled. An Institute for Supply Management survey revealed that more than 80% of companies believe that their organization will experience some impact because of disruption due to COVID-19. Of those, 16% of companies reported having already adjusted revenue targets downward by an average of 5.6% because of the pandemic.

The COVID-19 pandemic has shown that supply-chain disruptions could wreak greater havoc on the global economy than most governments had realized. Businesses that are nimble enough to switch suppliers and that have sufficient liquidity to survive periods of low sales and revenue will have a competitive advantage.

Education

Governments in 188 countries around the world have temporarily closed educational institutions in an attempt to contain the spread of COVID-19. These closures are impacting more than 89%, or 1.5 billion members, of the world’s student population. Although necessary, school closures cause huge economic and social disruption, especially for children. In the US, 30 million students depend on free or reduced-price meals at school for lunch, breakfast, snacks and, in some cases, dinner. Many of these students rely on a structured support system, which they may not be receiving at home, particularly in the case of children of low-wage workers in essential businesses who cannot afford to miss work. While some schools have instituted online learning, this creates additional equity considerations, particularly when some students may not have access to a computer or a reliable internet connection at home. The long-term effects of these disruptions are difficult to estimate. While some children will catch up on missed learning, others may eventually drop out, affecting their long-term earning capacity.

Other health considerations

The effect of COVID-19 on the management of other diseases or illnesses cannot be ignored. In addition to the impact on the availability of medicines and medical equipment discussed above, with overburdened hotlines and health care systems, patients in need of medical care for other critical, non-COVID-19 related issues may fall by the wayside. Many other illnesses, such as malaria, share some of the same initial symptoms as COVID-19 and, without an expert differential diagnosis, patients may be put at risk. In March, a 28-year-old man who returned to London from Zanzibar died of malaria, after failing to get through to the NHS hotline due to the volume of COVID-19-related calls. People suffering from mental health disorders, including those struggling with anxiety, depression and substance use disorders at higher risk of becoming increasingly symptomatic as a result of uncertainty, loneliness and isolation.

In less developed countries, the added surge in demand resulting from COVID-19 is likely to cripple struggling health care systems. During the 2014–15 Ebola outbreak in West Africa, access to health care services was reduced by 50%, exacerbating malaria, HIV/AIDS, and tuberculosis mortality rates. The indirect impact of mortality from other diseases actually surpassed the number of deaths caused by Ebola.

Demand shocks

Capital flows and trade in goods and services

Restrictions on movement and hence economic activities also have an impact on trade and investment through reduced demand for goods and services. Global declines in economic activity will reduce trade and affect imports of consumer goods from developing countries, particularly those with highly concentrated trade exposures to the EU and the US.

Travel and tourism

The travel and tourism industry has been the hardest hit by the economic disruption from the COVID-19 pandemic, with impacts on both travel supply and demand as well as huge job losses. In 2018, the travel and tourism industry accounted for 319 million jobs worldwide. Most airlines have already cut their flying capacity by at least 75% and announced widespread staff redundancies. Flybe, a UK regional carrier, was one of the first airlines to collapse following the emergence of the pandemic. According to the International Air Transport Association (IATA), COVID-19 is expected to cost airlines USD 252 billion in revenue in 2020. The United Nations World Tourism Organization (UNWTO) estimates international tourist arrivals could decline by 20% to 30% in 2020. This would translate into a loss of USD 300 to 450 billion in international tourism receipts. Severe acute respiratory syndrome (SARS), a previous disease outbreak caused by another newly emerged coronavirus, and which had a much narrower geographical reach and shorter impact, resulted in losses of USD 30 to 50 billion; this suggests that the potential losses from COVID-19 could be far higher than the estimates outlined above. The countries most likely to be negatively impacted are those that rely heavily on international tourism. For example, in the Maldives, travel and tourism contributes more than 60% of national GDP.

Personal consumption (retail sales, restaurants etc)

The prolonged economic disruption resulting from the COVID-19 pandemic is likely to lead to lower consumer and business confidence and decreased personal spending across a broad range of categories, with spillover effects for a multitude of other sectors. For example, retailers around the world are suspending or canceling clothing orders, threatening millions of factory jobs in Asia. Businesses that were retaining employees in the hope of a temporary impact will soon begin to lay them off, meaning households will therefore have less income to spend. During the SARS epidemic in 2003, retail sales growth in China declined by almost 3%.

Some large sectors of the economy, notably food and consumer goods, are likely to suffer much less as they tend to be essential and purchasing these goods does not involve a high risk of infection. However, other sectors, such as non-essential goods, luxury goods and restaurants, are likely to be hit hard.

Financial market losses

The impact of COVID-19 is likely to spillover from the real economy to the financing and financial markets. Disruption to shipments and production may create financial problems for some firms, particularly those with heavy debt. Traders may take investment positions that are unprofitable under the current conditions, weakening trust in financial instruments and markets. This could lead to equity and corporate bond market decline and/or financial market disruption, exposing investors who have underpriced risk.

As a response to the lockdowns in Europe during March, global stock markets plunged and oil prices tumbled, losing a third of their value – the biggest daily rout since the 1991 Gulf War. The Dow Jones and the S and P 500 Index are currently trading at more than 25% below their recent record highs. Although the Dow Jones has since shown signs of bouncing back, several experts have warned that the market meltdown is far from over.

The SARS epidemic is estimated to have cost the global economy around USD 40 billion (or 0.1% of global GDP). The impact of COVID-19 is expected to be substantially higher given its extended reach. The OECD and the International Monetary Fund (IMF) have warned that the economic shock from the virus is already larger than the global financial crisis of 2008. While legislators across the developed world including the European Central Bank (ECB), the UK and the US have already begun to deliver economic relief plans to help minimize the likelihood of an economic recession, economists have estimated that the global economy will shrink to between 0.5% to 1.75% through 2020 with economic losses of USD 1 – 2.7 trillion. In addition, the UN has also projected that foreign direct investment flows could fall between 5% and 15% plunging low-income countries into further disadvantage. Although the actual economic impact of COVID-19 will be difficult to assess until the pandemic is over, bold policy measures and innovative mechanisms will be needed to protect the most vulnerable from economic ruin and to sustain economic growth and financial stability. At the same time, countries will need to prioritize a strengthening of their surveillance and response systems to safeguard against the economic impact of future threats to health security.

Rima Shretta, Honorary Visiting Research Fellow, Centre for Tropical Medicine and Global Health, Nuffield Department of Clinical Medicine, University of Oxford.