Main economic losers of the COVID-19 pandemic

The global economic is on a standstill for the past two months as the novel corona virus has affected almost all the countries around the world. These countries have placed complete or partial lockdown to contain the further spread of virus. While the global leaders and international financial institutions are finding ways to bring this unprecedented situation to normalcy to some extent, this novel corona virus is still winning as it is engulfing more and more human lives and infecting more than 2.5 million persons around the world. As the World Health Organization (WHO) has cautioned the countries to be mindful while relaxing the lockdown, on the fear of second wave of the virus, it is expected the situation of lockdowns and economic inactivity will continue in the near future.

Businesses have been shut down, un-employment figures are sky rocketing, world markets have dried down, economic activity is limited to groceries and medical supplies. The IMF in its world economic outlook report April 2020 has projected that the global economy may contract by 3% in 2020 much worse than the global meltdown in 2008-09. Likewise, IMF believes that the economic activity in 2021 will also remain low therefore the recovery may also be on a lower side as compared to the earlier projections for 2021. With regards to Pakistan, the IMF has forecast contraction of GDP by 1.5% – a scenario which has not been witnessed in 70 years.

With the exception of few, almost all the business sectors have been hit hard by the pandemic. However, following three industries have been the most affected ones:

Oil industry

Due to the outbreak of COVID-19, there is suspension of flights and transportation across the world a huge downfall in demand for petroleum products has been witnessed globally. The oil industry is significantly affected due to the close down of the aviation sector especially.

With the WHO declaring the outbreak a global pandemic the word economy went into shut down. The oil consumption for first quarter of 2020 averaged at 94.4 mb/d while the demand is expected to be reduced further in the second quarter and possibly onwards. It is estimated that the global oil demand in the second quarter could contracting by approximately 25 to 30%.

On the supply side, the global output is around 100 million barrels per day. In order to bring price stability the supply side needs to be adjusted accordingly. However, it has huge ramifications such as losing market share and drying down of wells for the oil producers to slash their oil production. Therefore, some producers even support running a well at a loss for a specific period rather than shutting down entirely. While the existing oil storage capacity is reaching its maximum level, there would not be an option but to cut the prevailing oil production level.

In an attempt to stabilize the oil price, OPEC (largest oil supplier group) and non-OPEC countries announced to reduce their overall crude oil production by 9.7 mb/d (around 10%) w.e.f. May 1, 2020, for two months. Subsequently, for the next following 6 months the reduction will be 7.7 mb/d and a reduction of 5.8 mb/d for succeeding 16 months.

The consequences of the COVID-19 pandemic lead to an unprecedented worldwide oil price shock amid crude oil surplus. Currently the OPEC basket trades at USD 14.63 per barrel as compared to USD 65 per barrel in January this year. The Brent trades at USD 22 per barrel while WTI crude sells at USD 15.28 per barrel. Even the WTI reached a negative USD 40 per barrel for May contracts; however, it recovered to positive immediately.

Tourism Industry

It is spring season and around one third of the world population is under locked and limited to their couches. All the travel plans for the spring and summer have been cancelled by this unknown enemy. Similarly, all the domestic and global events have to be cancelled for an indefinite period. As some of us are dejected by the cancellation of our planned tours, it is feared that a major portion of the world population may lose their source of earning.

It is estimated that around 50 million jobs engaged in the travel and tourism industry worldwide would be lost due to the COVID-19 pandemic. The tourism industry currently accounts for 10% of global GDP therefore it would also have direct impact on the global output.

The tourism industry is one of the hardest-hit sectors of the economy by the outbreak of COVID-19. The demand side has fallen steeply due to travel restrictions and supply side has been knocked down by the lockdowns and social distancing measures. According to the UN-WTO, 96% of global destinations have impose travel restrictions ultimately bring the tourism industry to halt. All the persons employed by the tourism industry such as Hotels, Food & beverages, transportation, entertainment, travel agents & tour operators have lost their jobs over night.

The tourism industry has played a major role in making individuals financial independent, bring people out of the poverty and ensuing sustainable growth. If the spread of this virus is not contained in a timely manner it is feared that all the progress made thus far could be rolled back. It is also estimated that once the outbreak is under control, it would take up to 10 months for the tourism industry to return to its normalcy.

The worldwide tourism exports stood at around USD 1.5 trillion during the last year. According to the estimations made by UN-WTO, international tourist arrivals could decline between 20-30% in the current year 2020, against an estimated growth of 3% to 4%. This would translate into a loss of USD 300 to 450 billion to global tourism industry.

As the situation is unfolding this could be the biggest hit to this industry in the recent decades. During the SARS outbreak in 2003 and global economic meltdown in 2009, tourism receipts witnessed a decline of 0.4% and 4.0% respectively.

Aviation Industry

Another industry that has been fighting its survival against the corona virus pandemic is the aviation industry. Due to forced lockdowns around the world, the air transport has been suspended be it international or domestic. Scheduled flights have been cancelled and passenger planes have been grounded. Moreover, there is an uncertainty as to when the flight operations will resume.

According to an assessment made by the International Air Transport Association (IATA), worldwide flights are down by 80%. It is estimated that over 1 million scheduled passenger flights till June 30, 2020 have been canceled. It is estimated that there will be a reduction of number of passengers by 500-600 million in the first half of 2020 only. Therefore, it is anticipated that the aviation industry could incur a loss of USD 314 billion (55%) in revenue receipt during the year 2020. Earlier, the IATA estimated a positive outlook for the year 2020 with number of passenger expected to reach 4.72 billion (a 4.0% increase from 2019) and USD 581 billion in revenue receipts.

Due to these unexpected shocks, significant financial losses have been incurred by the industry, which is causing increase in their debt and liabilities. They are trying to reduce losses by firing employees and downsizing their operations while some have requested their employees’ to go on unpaid leaves.

It is a sign of relief that the most of the countries have allowed to carry out operations of air cargo which are performing a critical function to deliver the much needed medical and surgical supplies around the globe. Moreover, with the rock bottom oil prices, airlines will be able to hedge future oil needs at historically low prices.

As the global economy is going through a difficult situation, there is a dire need that all the policy makers around world should work together with a single agenda to overcome the atrocities left by this pandemic on the global economy. Further, the leaders should be swift and clear in their decision making according to the emerging developments.