Why is the coronavirus causing an economic crisis?
Introduction
The current issue that has been chosen is a coronavirus, a pandemic that has throttled economic activities worldwide. Since its outbreak in China, it has spread to most countries globally and caused many deaths and increased morbidity. As the pandemic continues to match across counties, governments have taken initiatives to ensure the diseases’ containment. These include the use of social distance, which is essential in preventing the spread of the infection. However, in taking these measures, the flow of goods and people worldwide has been affected. It has been causing an economic crisis (Evans, 2020). Hence, there is a need to delve into how the pandemic continues to throttle global economies.
Research Questions
The primary question of this research is, “why is the coronavirus causing the economic crisis?
It will also look at the sectors most affected by the pandemic, creating the question, “what are the major sectors of the economy affected because of coronavirus?
Body/Arguments
The economic crisis due to the pandemic has affected all counties in the world. It is throttling economies at an unprecedented level regardless of low and upper-middle-income counties. As such, it has been creating a significant economic slowdown, where more than a third of the world’s population is on lockdown. It is critically important to analyze the effects of coronavirus pandemic on different sectors like oil, tourism, aviation, and the financial industry.
Roy (2020) examines how the aviation sector has experienced significant effects of the coronavirus pandemic because of the governments’ travel bans and cancellation of flights to prevent the spread of the virus from one country to another. As a result, the aviation sector has experienced an economic crisis because of a lack of air traffic and revenue losses. The Airport Council International also provides that there will be a fall of two billion airline passengers in the 2nd quarter of this year. Travel bans have caused airports to have a reduced number of passengers traveling from one country to another. In the second quarter of this year, it is estimated that the aviation industry has experienced a loss of 39.2 billion dollars. The figure is expected to rise to ninety-seven billion at the end of the year. Besides, the oxford economic study provides that there will be a reduction in the expenditure on air travel by 519 billion dollars in the United States. Because of this, it is estimated that economic output is expected to reduce by 1.2 trillion dollars. There will also be a loss of jobs in the sector, where 6.9 million people are expected to go jobless. It is approximated that more than fit percent of the world aircraft are in storage. Besides, losses experienced in the sector will significantly affect GDP by six hundred and fifty-one million dollars. Some airlines in the United States have started taking measures to mitigate these effects because of these effects. For instance, tickets bought before March 1st can be changed without the need of paying fees. Secondly, the tickets purchased between March and September this year can still be used until December. There has also been a reduction in the flight capacity by between 80 and 90% for international flights. Domestic ones have been reduced by between 60 and 70 (Roy, 2020). These are continuing to cause economic effects, as the aircraft cannot carry to their full capacity.
The effects of the pandemic are also felt in the oil industry. The shock experienced because of the coronavirus has caused disruptions for organizations involved in exporting petroleum products. It has also caused the fall of oil prices because there was a slow industrial and transport activities. The reduced costs and reduced demand for oil have reduced the revenue generated because of oil activities. Countries depending on oil like Nigeria in Africa and Venezuela have experienced these significant effects in South America. As a result, there have been significant impacts on these countries’ foreign exchange because of oil activities. The national budget of oil-dependent countries has also been slashed, creating the need for them to restructure their national budget, as the previous one dependent on foreign exchange obtained from the sale of oil. There has been a rise in deficits in the national budgets for countries depending on oil. The states have taken measures to address the deficit by borrowing from the World Bank or the IMF to finance their deficits. This year, the oil demand has significantly reduced because of the restrictions put by most governments to curb the spread of the pandemic. It has created a reduced need for the commodity. For instance, the aviation industry is one of the primary consumers of oil products, as they constitute an eleven percent demand for the commodity in the transport sector. As such, the consumption of the commodity is six million barrels per day. As such, their consumption of the commodity has been affected by travel bans and grounding of aircraft. It has been reduced by ninety thousand barrels in a day. The production of oil has also been affected because of reduced demand. Besides, the number of oils producing companies is also reducing the number of employees to curb the pandemic’s spread. The strategy has also been backed by most governments even though it results in the production of oil.
Nicola et al., 2020 provides that the pandemic has also affected the tourism sector because of the travel bans that have been used in curbing its spread. As such, it will continue to have a long-lasting effect on the industry. Most tourist attraction centers do not have enough number of tourists to ensure that they continue operating. There are still travel ban restrictions, and most airplanes are still non-operational. Even if there will be resuming of tourism activities globally, they will yet be required to practice social distancing measures. It is expected that there will be an increase in the number of coronavirus cases if there is uplifting of travel bans and re-opening of hotels/resorts before the pandemic could be contained. Before the rise of coronavirus, countries like Spain and Italy were experiencing economic problems because of increased debt and unemployment. The epidemic has affected their economies because of reduced tourism activities in both Spain and Italy. Tourism generated 14.3 percent and 13 percent of their GDP last year. In the United States, it contributes 8.6% of the GDP, implying significant impacts on the economies (Roy, 2020). The pandemic has also affected the local people who depended on the tourist activities to earn a living. Hence, there has been job loss. For instance, in the United States, more than eight million people have lost their jobs, and the spending in the sector has reduced by five hundred billion dollars (Nicola et al., 2020).
Fetzer et al., 2020 provides that financial sectors are also facing economic impacts. In February this year, there was volatility, risks, and uncertainties surrounding the financial market. The loss in the equity market value was more than thirty percent within a few weeks, which was more than the one experienced during the 2008 Financial Crisis that affected the financial markets. The United States market experienced reduced liquidity. These disturbances made it challenging for the government and business to borrow money. The central bank took similar measures experienced during the financial crisis experienced in 2008 to reduce uncertainties experienced in the sector (Altig et al., 2020). The funding loss was addressed within weeks. For instance, it announced the need for buying assets to propagate liquidity in vital asset classes. The effects of the crisis will be long-lasting in various counties, as the economic crisis has created a slowdown, which will continue to create problems in the financial systems. It can lead to a financial crisis if it continues. However, equity markets have tried recovering since their slowdown in March. There is also the need to aid the government in enabling firms to experience the crisis to recover. The financial sector in developing countries is also at risk because of the reduced prices of commodities resulting from reduced demand, disturbances in the supply chain, and reduced exported products resulting from recession in developed nations. The industrialized nations have been helped by the aid of fiscal packages, which is not the case in developing countries. The banking sector has also been severely affected by the pandemic because of reduced sales and profits. The main concerns faced by the banking sector is the travel bans, rise in call volume, and lack of adequate digitization. There is also a reduced number of borrowers paying back their loans as most business is closed, and people have been rendered jobless.
Conclusion
In summary, this paper looks at how the coronavirus is causing a severe economic issue in developed nations like the United States, Spain, and Italy and developing nations like Nigeria and Venezuela. Every country in the world has been affected, as key economic sectors like aviation, tourism, financial, and oil industry face a pandemic caused by measures like travel bans, social distancing, closure of hotels, etc. prevent the spread of the epidemic. It creates the governments’ need to provide aid for these sectors to improve the situation and prevent companies from shutting down completely.
References
Altig, D., Baker, S., Barrero, J. M., Bloom, N., Bunn, P., Chen, S., … & Mizen, P. (2020). Journal of Public Economics, 104274.
Evans, O. (2020). Socio-economic impacts of novel coronavirus: The policy solutions. BizEcons Quarterly, 7, 3-12.
Fetzer, T., Hensel, L., Hermle, J., & Roth, C. (2020). Coronavirus perceptions and economic anxiety. Review of Economics and Statistics, 1-36.
Nicola, M., Alsafi, Z., Sohrabi, C., Kerwan, A., Al-Jabir, A., Iosifidis, C., … & Agha, R. (2020). The socio-economic implications of the coronavirus pandemic (COVID-19): A review. International journal of surgery (London, England), 78, 185.
Roy, S. (2020). ECONOMIC IMPACT OF COVID-19 PANDEMIC.