Economic Effects of COVID-19 Pandemic

Now it is more than two years since the COVID-19 virus first appeared in China. Its overall effects are becoming clearer. It killed millions of people in a short time. It led to a deep recession. It disrupted the lives of many people all over the world. It pushed millions back into poverty. It is no wonder that the UN Deputy-Secretary-General characterized the situation as "we are facing a human crisis unlike any we have experienced". The severity and the depth of the economic effects of the pandemic are considered by many to be on the same level as the Great Depression or the Great Recession. The pandemic is essentially a health crisis. As of January 11, 2022 the number of cases has risen to about 312 million and the number of people died is more than 5.51 million. These are the official figures. The estimates of the excess deaths due to COVID-19 are about three times the official figures. The infection and death rates varied greatly across time and countries. The factors such as the age composition of population, the measures adopted, the strictness of the measures applied, the degree of readiness of the public institutions for a pandemic, and vaccination played an important role in the infection and death rates. For example, the countries which were affected by the SARS pandemic, seemed to be more ready for the COVID-19. The countries with an aged population, most of which are high income countries suffered higher death rates, because the incidence of death was significantly more on aged groups. The lockdowns, social distancing measures and travel restrictions caused an immediate drop in employment and production as well as a sharp drop in demand and some changes in the composition of demand. The recession hit all the countries. Though some recovered earlier than other countries. For example, in the United States, there were decreases in real GDP in all quarters of 2020. The major loss (decrease compared with the real GDP in the fourth quarter of 2019) in real GDP (10.1%) occurred in the second quarter of 2020. The general economic activity was lower in the five consecutive quarters following the last quarter of 2019. The second quarter of 2021 was the first time that the level of real GDP was higher than the level in the fourth quarter of 2019. In the first quarter of 2021, the cumulative loss had reached to 17.8% of real GDP of the fourth quarter of 2019. The cumulative loss decreased to 12.3% with improvements in the remaining three quarters of 2021. On the other hand, the total loss from the long-run trend is about 28%. The cumulative change from the final quarter of 2019 was negative in 80 out of 97 countries or regions. The negative change was the highest in Spain with 69.0%, followed by the Philippines (67.4%). In about 7 quarters, some countries started to turn the losses to minor gains. Serbia (cumulative change of positive 0.5%) and New Zealand (0.6%) are leading these countries. The changes were significantly positive in Ireland (76.7%), Turkey (30.6%), Taiwan (29.9%), China (25.7%), and Egypt (19.1%), among others. Comparisons with the level in December 2019 reveal that changes were even bigger for industrial production. For example, the Philippines had the biggest cumulative decrease, compared with the level in December 2019, in industrial production (347.0%), followed by Portugal (183.8%). These are much bigger decreases compared with decreases in real GDP. Since 33 countries/regions were on the positive side of the cumulative percentage change from December 2019, one can conclude that generally a relatively faster recovery was observed in industrial production compared with real GDP following large declines in economic activity due to the pandemic. As expected, export is one of the activities that was adversely affected the most by the pandemic. Cumulative decreases were quite large in some countries. On the other hand, there were large increases in exports in in some countries in 2020 and 2021 because of a very low starting point. Largest cumulative decreases in exports from December 2019 were observed in Nigeria (789.7%) and United Kingdom (394.8%). Largest cumulative increases in relation to the level in December 2019 were observed in Guyana (2201.7%) and Zambia (884.1%). One of the results of the pandemic was that sectors were affected in different ways and degrees. For example, since accommodation, restaurant, and hospitality sector required face to face interaction, it was affected much worse than some others. Educational services, transportation, utilities, retail trade, and mining were also among the sectors affected adversely both because of the working conditions and changes in the composition of demand. On the other hand, the demand increased for some services such as information and services which could be provided online did not suffer at all. For example, finance and insurance witnessed growth in real terms. The first visible impact of the COVID-19 on economic life was in the labor markets. The lock-down measures and social distancing rules led to an immediate decline in working hours and employment. The impact of the pandemic was deep and the recovery has progressed slowly. The global level of unemployment was 186 million in 2019. It is estimated to be 207 million in 2022, and it is expected that 2019 level will be reached in 2023 according to the ILO forecasts. Furthermore, the recovery varied with income levels of countries. Lowermiddle income countries performed worse than the others. Also many people have left the labor force. The 2022 labor force participation rate is forecasted to be still lower than the 2019 rate. The pandemic caused a very big declines in employment in the United States. Although, there were gains in employment after the second half of 2020, more than 20 million jobs lost due to the pandemic were not recovered, yet. The level of employment in March of 2022 is still below what it was in December 2019. In the United States, while the largest percentage decline in employment from December 2019 to March 2022 was observed in scenic and sightseeing transportation (28.3%), the largest percentage increase was observed in warehousing and storage (37.7%). The arithmetic average of the monthly rate of unemployment in the United States during January 1948 to March 2022 was 5.75%. The maximum unemployment rate was 14.7% (April 2020) , followed by 13.2% (May 2020), and 11.0% (June 2020). These are the three highest numbers since 1948. Among 65 countries/regions that data were released by the World Bank GEM, largest decreases in unemployment rate compared with the rate in December 2019 were observed in Greece (2.9%) and Turkey (2.2%). Largest increases in the rate of unemployment were realized in South Africa (5.5%) and Sub Saharan Africa (5.5%). The largest decreases in stock prices (in terms of US dollars) from December 2019 to December 2021 in 75 countries/regions were observed in Kenya (35.8%) and Brazil (31.6%), while the largest percentage increases from December 2019 were realized in Iran (275.1%) and Argentina (127.4). During 2020, the precious metals price index continued its increase compared with decreases in other indexes (energy, non-energy, fertilizers, and metals and minerals). A further look reveals that gold is the commodity deriving the increase in the precious metals index, and not silver nor the platinum. This is no surprise because gold has been seen as the key asset during periods of uncertainty. Comparisons of March 2022 price with December 2019 price reveal that the largest increases were seen in natural gas price in Europe (489%), while the largest decreases in prices were observed in tea (9.4%). The pandemic exacerbated the tendencies in global inflationary pressures. Largest percentage changes in GDP deflator from the final quarter of 2019 were observed in Argentina (92.8%) and Turkey (41.4%). There were only two countries in the group of 83 with decreases in GDP deflator (Ireland 3.0%, and Japan 0.4%). In the United States, the headline price index for consumer prices increased 11.4% from December 2019 to March 2022. Among countries, largest increases in the consumer price index from December 2019 to December 2021 were observed in Lebanon (588.7%) and Turkey (55.9). Bahrain, Fiji, and Japan had decreases in consumer prices from December 2019. The border closures, lockdown in supply markets, restrictions in vehicle movements, interruptions in trade, labor shortages, and maintaining of physical distance in manufacturing created multidimensional negative impacts on supply chains. The trade as share of world GDP fell from 56.3% in 2019 to 51.6% in 2020. The export of goods and services declined by 8.9%. The net inflow of FDI fell from 1.7% of GDP in 2019 to 1.4% in 2020. In the decline of trade and FDI the disruption of supply chains and hence GVCs played an important role. The impact of COVID-19 has been more severe in comparison to recent epidemics such as SARS 2003 and H1N1 2009. Furthermore, its impact has been more diversified and dynamic. In the case of COVID-19 all the nodes (enterprises in the chain) and edges (relationship between enterprises) were affected simultaneously. GVCs both propagated and mitigated the impact of COVID-19 lockdowns. GVCs also played an important role in the rapid recovery of trade observed in the second half of 2020 in USA. As long as governments do not try to decrease dependency on other countries and firms do not go into vertical integration GVCs continue to grow. It is possible that firms will shift their input sources towards some other developing countries where prices are more favorable and the supply reliable. They will not reshore, near-shore or The immediate impact of COVID-19 was on output and employment. The sharp drop in output and increase in unemployment led to increasing inequality of income distribution and poverty. Furthermore, disruption of educational activities created conditions for exacerbating the inequality in the longer term. The COVID-19 pandemic brought about one of the largest fiscal and monetary policy responses compared to previous crises seen in the world. The U.S. which is by far the most affected country in terms of infections and the number of deaths has allocated significant budgetary resources, around 25 percent of GDP to dealing with the pandemic in 2020. The average fiscal cost for the high-income countries was around 10 percent of GDP and less than half of that for the emerging markets. Some countries chose to make credit accessible to corporate and household sectors while spending limited amounts of budgetary resources for direct support. Because of the multitude of factors involved in dealing with the pandemic, it is difficult to attribute outcomes to financial resources expended particularly in the middle- and low-income countries. Regardless of the type of the dominant instrument, fiscal or financial, large sums of liquidity were injected into the economies. This helped a faster recovery than most expected and reduce the suffering from supply shortages due to logistics breakdowns. These large outlays limited the fiscal space for many governments and reduced the margins of maneuverability for monetary policy in the coming years. Only time will tell the trade-off between forgoing high priority spending in the future and the outcomes of the pandemic-induced expenditures. This includes the impact of the global inflation faced today, some of it can be traced back to monetary expansion to deal with the pandemic, but there are other aggravating factors like the Russian invasion of Ukraine, sanctions, and the vagaries of the energy markets. According to UNESCO the COVID-19 pandemic has been the worst shock to education systems in a century, with more than 1.6 billion children and youth not being able to attend school for months. The pandemic hit the education system all over the world. All levels of education were affected. Most damaging effect was felt by all the children at risk, marginalized, and children with disabilities. It affected 99% of students in low and lower-middle income countries. Some of the impact of school closures on students were in short–term, but some will be felt in the long-term. Furthermore, this impact was uneven and unequitable across countries and within countries. The global learning crisis has grown by even more than previously feared: this generation of students now risks losing $17 trillion in lifetime earnings in present value as a result of school closures, or the equivalent of 14 percent of today’s global GDP, far more than the $10 trillion estimated in 2020. In low- and middle-income countries, the share of children living in Learning Poverty—already over 50 percent before the pandemic—will rise sharply, potentially up to 70 percent, given the long school closures and the varying quality and effectiveness of remote learning. The international inequality of income distribution (inequality between countries in terms of GDP per capita) tended to increase with the pandemic. The lower income countries faced a higher drop in output than in relatively higher income countries. International inequality takes each country as a unit at per capita income. If this measure is weighted by the population, that is, each person earns the same per capita income then the deterioration in the distribution becomes more clear. Indeed, China and India dominates the distribution. If they are excluded both pre- and post-pandemic inequality increases. The relatively quick recovery of China played a role in this development. Still there are very few household data to measure the effects of the COVID-19 on national inequality (within country distribution of income). The available data and studies suggest that in many countries income inequality increased or the potential for more inequality got stronger. The countries which supported the unemployed with various subsidies slowed or reversed the worsening in inequality. International and national distribution of income constitute the global distribution. It is not wrong to forecast that the overall effects of the COVID-19 pandemic on income inequality is negative. The effects of the pandemic on poverty is related to its effects on income inequality. It seems that the worst effect of the pandemic is felt by the poor. Millions of people fell back into poverty.