COVID-19 might have killed “supply-side economics” that since its conception in the 1980s boom, created demand from the surfeit of supply, and plumped up consumer-driven economies.
Supply of goods and services is the main problem brought by the quarantines and lockdowns to contain the spread of the virus. The fear for one’s health and the recast psychology of consumers will, and has, affected the demand side of the changed economy of the world. There are now 6,861,716 confirmed cases worldwide of COVID-19 infection; 398,483 deaths; and 3,361,447 recoveries as of last Saturday, June 6, since the virus was first found in Wuhan, China in December 2019. The Philippines, number 39 of the most infected out of 215 countries, has 20,626 cases, 987 deaths, and 4,330 recoveries, all data from the worldometers.com coronavirus live update (June 6, 2020).
The International Monetary Fund (IMF) said the coronavirus pandemic had instigated a global economic downturn the likes of which the world has not experienced since the Great Depression. The US GDP dropped by 4.8% in the first quarter of 2020 — the sharpest contraction since the global financial crisis of 2007-2009 — bringing to an end the longest economic expansion in US history. The European Commission, in its forecast released on May 6, said that the GDP of European Union (EU) countries will contract by 7.5% in 2020. In the UK, the Office for Budget Responsibility (OBR), warned on April 14 that the country’s economy could shrink by a record 35% by June 2020.
On April 15, the IMF warned economies in Asia would see no growth this year, for the first time in 60 years, with the service sector particularly under pressure, as reported in the same WEF website. According to official data, the GDP of China, the world’s second largest economy, fell 6.8% in January-March year-on-year, and will likely fall to 2.5% for 2020 vis-à-vis 2019, its slowest in almost 50 years.
The compounding effect of the fall of countries’ GDPs on each other and with China has reduced global demand and supply for products and services traded. In China alone, factory production plunged to its lowest and slowest in three decades in the first two months of the year. China makes up a third of manufacturing globally, and is the world’s largest exporter of goods.
The global travel and tourism industry, and the service sectors of economies were totally shut down in the first two critical months of the pandemic. Demand for oil has all but dried up as lockdowns across the world kept people in their homes. Coronavirus pulled the price of oil down to below $20, the lowest level seen in 18 years.
The stock exchanges, the FTSE, Dow Jones Industrial Average and the Nikkei have all seen huge falls since the outbreak was felt and known in December. As of April 9, the S&P 500 stock index plunged more than 13% since the start of the year, while global oil prices plummeted more than 47% year-to-date.
The International Labor Organization (ILO) has warned that nearly half of the global workforce is at risk of losing their livelihoods. More than 36 million Americans have filed for unemployment pushing the April unemployment rate to a record 14.7%. The UK’s OBR said unemployment could rise by 2.1 million to 3.4 million by the end of June. In India, 122 million jobs (91 million small traders and laborers) were lost in the lockdown, according to data released on May 5 by the Centre for Monitoring the Indian Economy.
At the start of April in Spain, nearly 900,000 people have lost their jobs, bringing the official unemployment to 3.5 million, the highest since April 2017. Bloomberg reports that around half of jobs in Africa are at risk as a result of the outbreak, according to the United Nations Economic Commission for Africa. In the Philippines, the Department of Labor (DoLE) estimates the jobs lost to be 6 million to 10 million, as news reports last weekend already talked of 7.5 million actually jobless.
The US government passed an unprecedented $2 trillion stimulus package at the end of March, including direct payouts to millions of Americans. The European Central Bank (ECB) launched on March 18 a €750-billion Pandemic Emergency Purchase Program that is expected to last until the end of this year. The UK said it would pay up to 80% of the wages of employees across the country unable to work, as most businesses shut their doors to help fight the spread of the coronavirus that causes COVID-19. Denmark announced it would help private companies struggling to manage the fallout from the pandemic by covering 75% of employees’ salaries, if firms agreed not to cut staff. Poland put restrictions on access to state aid based on whether large firms pay taxes in the country. The EU implemented fiscal measures worth more than €3 trillion to help the economy.
It seems to show the helplessness of world economies against the world pandemic that the standard reaction of governments to intervene and cure the economic downturn would not work while the vaccine and cure for COVID-19 are not yet available. Maybe in one or two years, a fully tested and approved vaccine will be available to the world, epidemiologists say. The US and Eurozone’s economies could take until 2023 to recover from the impact of the COVID-19 crisis, according to a new report from consultancy McKinsey & Company.
So, will continued government intervention have to sustain, and ambitiously jump-start failing economies? Will tweaking monetary policy to put more opportunities in the market for consumers, investors, and businesses in the short term penalize the long term for inescapable repayments and corrections to front-ended availments of spending money? Will outright subsidies and incentives to businesses and cash dole-outs to the people have more than present relief?
A BusinessWorld report on the survival plan of businesses from the coronavirus effects notes: “In the Philippines, a number of blue-chip companies have cut capital spending and suspended expansion plans this year, some of them laying off workers to stay afloat. Some of these big companies were forced to shift their focus to their main businesses, ruling out investments in new ventures.”
The MVP Group is halving its 2020 capital expenditure to P80 billion as it cuts investments in new ventures such as hospitality and logistics. Ayala Land, Inc. told stockholders on April 22 that it was reducing spending to P70 billion from P110 billion, while International Container Terminal Services, Inc. told the stock exchange on April 24 it was trimming its capex to $100 million from $400 million.
Other examples are: Cebu Air parent JG Summit Holdings, Inc. which cut its capital spending this year to P58 billion from P82 billion; Aboitiz Equity Ventures, Inc. has also cut its spending to P47 billion from P73 billion. While big companies make up less than 1% of Philippine enterprises, they provide about 3.33 million jobs, or more than a third of the country’s workforce, based on 2018 data.
And against this reality for businesses, must our political leaders and legislators insist on a P1.3-trillion COVID-19 economic stimulus package when even economic managers say the government can only afford P130 billion for spending programs? It seems that politicians intuitively know the PR benefits to them, especially in this fearsome time of the coronavirus pandemic, to be seen as generous with economic support. Acting Socioeconomic Planning Secretary Karl Chua said the amount legislators are proposing would require new revenue sources, which are “very limited” because multilateral lenders and the bond market, for example, are not readily available in this pandemic scenario. Moreover, the Constitution states that for special appropriations, funds have to be “actually available.” They must be certified by the Bureau of the Treasury and raised through a corresponding revenue source. Government debt has already jumped to a record P8.6 trillion in April, and legislators should not argue that the country’s debt-to-gross domestic product (GDP) ratio can allow us to borrow more now and worry later about repayment.
Thank God for our prudent government finance and economic managers, who know that COVID-19 has turned economics upside down, and forced a discernment towards a realistic strategy for very limited resources in a hazy timeline. Best to review tax cuts and incentives for businesses and other supply-side-based economic programs to generate revenues that were envisioned before COVID-19 wrecked the economic plans and strategies for the country and the world.
Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.