Economics in the Time of COVID-19
Then the virus hit. The human toll is already dramatic, with disruption to personal
and business routines via quarantine, work closures, and mobility limitations – first in
China, and then spreading worldwide. There is uncertainty about the epidemiological
progress of the virus, over how long and the extent to which routines will be affected
and the spillover to the global economy, and over how financial markets are digesting
news, rumours, and data. The interrelationships between the responses of authorities,
businesses, consumers, and markets are complex and hard to model, but will determine
the quarterly evolution of data as well as prospects for the year as a whole and into
2021.
- The real economic impact of the virus requires evaluation through multiple
data lenses: (1) manufacturing supply chains; (2) tourism, transportation, and
services relationships; and (3) energy and commodity demand and prices.
These linkages and factors have different weights for different countries, so the evolution
of growth during 2020 and 2021 will be affected by the intensity of an economy’s
production, consumption, and trade across these three data lenses, because each will
have a different ‘shape’ to its shock and recovery.
Manufacturing will show a ‘V’ or ‘U’ shape. Manufacturing spillovers from factory
closures loom large in the near term, but production will rebound to restock inventories
once quarantines end and factories reopen. However, the duration of closures, as well
as spillovers through supply chains and through virus cases and closures worldwide,
will generate a set of Vs that should take on a U-shape in the global data. Importantly,
the loss to global growth momentum will drag on both in individual country data and
global rebound economic data, particularly trade and industrial production.
Services, on the other hand, will experience an ‘L’ shape. The shock to tourism,
transportation services, and domestic activities generally will not be recovered, and
the projected slowing of global growth will further weigh on the L-shape evolution of
demand for these non-storable tradeable services. Domestic services also will bear the
brunt of the outbreak, depending in part on the responses of authorities, business, and
consumers.
Energy and commodity prices are showing the pivot already, and there will be
winners and losers. The third real-side data lens is the evolution of energy prices and
commodity prices, which can either exacerbate or offset the other shocks, depending
on an economy’s structure of production, consumption, and trade. As an example of the
change in expectations elicited by the coronavirus shock, Citi’s energy price base case
changed from a near-term 10% increase in energy prices in the January projection to a