How COVID-19 Will Affect the World Economy?

The COVID-19 crisis can cause an important transformation in global supply chains and sectoral structures

COVID-19 outbreak caught the whole world off-guard. Economies around the world suffered tremendous blows due to individual, public, and corporate semi-quarantine measures. International mobility has decreased severely. Global supply chains have been broken to a considerable extent. Oil prices have decreased to incredible lows due to the collapse in demand. Stock markets plummeted within a short period of time. And the investors’ risk appetite fell to almost nil and there have been more than 100 billion dollars of capital flight from developing countries.

On the employment side, the global economy faces a more severe unemployment risk than that of the Great Depression in the 1930s. Governments have announced massive rescue packages that are as much as several percent of their respective national incomes to prevent real economies from collapsing and to prevent unemployment from reaching unspeakable highs. One should also underscore that, during this period, dramatic rises in public expenditures along with tremendous declines in tax revenues may easily result in budget deficits that could reach unprecedented levels on a global scale.

As we can see, the world faces a crisis that has never been experienced in modern history before. We don’t know how long the pandemic and the measures will last and how severe it will be. However, we may need to prepare ourselves to 1-2 year(s) of difficult times and 2-3 years of an aftershock period.

And how this crisis will affect the world economy in the long term? First of all, this crisis can cause an important transformation in global supply chains and sectoral structures. Global supply chains have always had a serious share in the modern world. And with the expansion lasted from the 1990s to 2008, the share of global supply chains in the world trade increased from 40 to around 50 percent. The huge merger and acquisition (M&A) wave that started in the second half of the 1990s and continued until now has also fostered this transformation. Since 1995, the total value of mergers and acquisitions between companies in the world never fell below $1 trillion a year, and typically was more than $2 trillion a year. The reason for all of this was the desire of companies to globally benefit more from economies of scale and cheap labour. It was not rational at all not to work with the most suitable supplier with the cheapest labour force in the most appropriate region in the world, provided that the desired quality was achieved.

The coronavirus crisis can substantially change this rationality approach. Yes, it is quite rational to work with the most suitable supplier for intermediate goods regardless of the geography. However, this can also mean putting all the eggs in one robust basket. While this strategy is very rational at normal times, it can lose its rationality in such extreme times. And this is what we are experiencing now. Local and global companies are probably going through a silent transformation in their rationality approach. Therefore, we may see that globalisation will considerably retreat and localization will get stronger in the long term. With this new rationality approach, multinational companies in developed countries can move a significant part of their production to nearby geographies and even to their own countries. While the former can be an important opportunity for Turkey, the latter approach can speed up the robotization/automation processes in the world.

Secondly, this outbreak has clearly shown how the health and food sectors are critical for sustaining human life. This means that there may be a significant increase in both public and private sector interest towards these areas globally in the long term.

Thirdly, the number of white-collar employees working from home has reached a significant level, resulting in the realization that they can also carry out their works like this in the future and this may lead flexible working practices to become widespread in the post-pandemic world. Again, this transformation may lead to a world where a significant share of meetings and interviews are held online. Thus, there may be a marked decrease in the mobility of employees for business purposes.

Fourthly, for the businesses (such as cafes, restaurants, and movie theatres) where people are in close contact with each other, it can take years to completely recover due to precautionary and psychological reasons. Furthermore, this process may lead to permanent changes in many people’s habits. And it can lead to a permanent loss of demand in these sectors, causing the sectoral composition in the real economy and employment market to change significantly. COVID-19 process can also speed up the increase in automation globally.

Fifthly, the global tourist mobility may never reach its previous levels for years due to precautionary and psychological reasons. Moreover, this process may cause a permanent change in the habits of people, resulting in a decline in aggregate demand for the tourism sector and/or an expansion of regional tourism against global tourism. This may especially affect East and South Asia.

Assoc. Prof.   Mevlüt Tatlıyer