제 6 호 How the Impact of Social Distancing Ripples through the Economy
Kicker: WORLD (ECONOMY)
How the Impact of Social Distancing Ripples through the Economy
Economic effect of Social Distancing
by Min-gyeong Lee, Editor
lee.mkpeach@gmail.com
As coronary virus-caused pneumonia* patients surged in China, production facilities, including major factories, were shut down or closed. Because China, where production bases from around the world are concentrated, has ceased operations, it has been affecting production and supply and demand, leading to an international wave. Following the global pandemic situation, the economic impact has become more serious due to the reduction of the mobile population and the shrinkage of consumption due to the prevention of epidemics in each country. Let's take a look at the impact of Covid-19 on the global industry financial economy.
*pneumonia: a serious illness in which one or both lungs become red and swollen and filled with liquid
A view of the Duomo square during lockdown.
Originally a crowded place with tourists and passers-by, there are birds instead of humans.
Characteristics of Corona 19 and its Impact on the Global Economy
The economic impact of COVID-19 is not small. According to a study by Smit et al., in a pessimistic case, the impact is likely to persist until next year. Production is expected to decline by more than 6% this year and production levels are unlikely to recover next year. Europe and the United States are expected to experience more severe setbacks and a decline in production of nearly 10%. It is not easy to restore a broken economic relationship. In the long run, this economic reality should be taken seriously.
The reason why COVID-19 is so powerful is derived from its characteristics. The current epidemic of COVID-19 is moderate in severity, given its epidemiological* characteristics. The propagation rate and fatality rate are lower than the conventional SARS or MERS. Compared to the Asian flu epidemic in 1957 or the swine flu in 2009, they are higher. On the other hand, other plagues can be vaccinated against, but Corona 19 has not. Chickenpox, measles, and smallpox are still potential epidemics, but immunization is possible through preventive injections. Besides, the main feature is that COVID-19 has no treatment.
*epidemiological: relating to the scientific study of diseases and how they are found, spread, and controlled in groups of people
In addition, countries with an extremely large number of infected people are so-called developed countries. It seems that these countries were open to the outside world and had a lot of exchange with foreign countries, so the influx of COVID-19 was inevitable. This factor provides important clues in determining the future impact of COVID-19 on the economy.
As Corona 19 hits the world, the prospect that Amazon, an e-commerce company, will have a more unique position in the distribution industry is gaining momentum.
Industry Features and Impact of the Policy for Prevention of Corona 19
Therefore, the impact of the the policy for prevention from Corona 19, “Social Distancing” varies from industry to industry, and the standard is the “contact intensity” of the industry. High contact-intensive industries suffered deterioration in operations and production, while low contact-intensive industries suffered less economic damage.
High contact-intensive industries are authentic manufacturing, and the world's leading economies, China, the United States, and Germany, which are leading manufacturing industries have stopped their operations, and the world's major economies have been hit hard. According to the Organization for Economic Cooperation and Development (OECD), since the 2009 economic crisis in the United States, the global economy has seen the slowest growth due to the Corona19 crisis.
However, while the real economy* suffers, the ICT (Information and Communication Technology) industry has a relatively small impact on COVID-19. And in the future, the promising possibilities for the development of telecommuting and virtual reality-related technologies has the potential for this industry to develop. Therefore, there is room for the ICT industry to be better off.
*real economy: the part of a country's economy that produces goods and services, rather than the part that consists of financial services such as banks, stock markets, etc.
Dollar buying increases due to economic unrest
Social Instability Increases: Unemployment and Dollar Buying
Above all, unemployment issues are emerging worldwide. The earliest signs of COVID-19 having a great impact in the long run appeared in the labor market. On March 21, the number of applicants for unemployment benefits announced by the US Department of Labor reached 3.3 million. This is an unprecedented level since the statistics in 1967.
The unemployment problem is a fundamental factor leading to long-term depression or panic attacks. Even in the Great Depression, the financial (banking) problem was somewhat calmed by the decision to close the banks in early 1933, but the unemployment problem remained unresolved until World War II. And even after the global financial crisis in 2008, after a large amount of unemployment, it took almost ten years for employment to recover to its previous level. Now, the rate at which the United States emits unemployment is so fast that it is difficult to find precedents in the past. Therefore, of course, the impact is tremendous in the long run.
In terms of the number of applicants for unemployment benefits*, it is clear that unemployment will reduce the US supply capacity in the future. In other words, production will have to be reduced. And for unemployed people, as their income decreases, their consumption capacity will weaken and, consequently, demand will shrink. Massive unemployment can also result in financial burdens for the payment of unemployment benefits. The emission of the unemployed can be seen as reflecting the problems of the real economy sector.
*unemployment benefit: money that the government pays to unemployed people who are looking for a job
Compared to this, the new peculiar signs that the problem of the financial sector can be known have recently been found. It was a tendency to purchase dollars heavily. Among the safe assets*, “gold” is a representative example, and as uncertainty increased, the price of gold, regarded as a safe type of asset, also rose, but it has been falling since March. On the other hand, the recent dollar purchase is constant enough to affect the economy, including the stock financial market, and the current situation is serious enough that even spot goods are not recognized as safe assets. Although the withdrawal of funds and the securing of cash may seem reasonable on a personal level when a crisis occurs, the current situation is considered dangerous because it could lead to a collapse of the whole society.
*safe assets: the assets which, in and of themselves, do not carry a high risk of loss across all types of market cycles. Some of the most common types of safe assets historically include real estate property, cash, etc.
Changes in the World and South Korea in the Field of Equity* Investment
In addition, the stock market is facing a downward trend. Investors are concerned about the economic impact of Corona 19 as it spreads out of China. The major stock** markets in the last week had the worst performance since the 2008 financial crisis. European and US stocks were up slightly as some countries began to intervene to minimize the impact of Corona19. For example, the US Central Bank cut interest rates dramatically. This can theoretically lower the interest rate and stimulate consumption to boost the economy. From a pessimistic point of view, the uncertainty amplified due to people's anxiety, making the stock market difficult to predict.
*equity: the ownership interest of shareholders in a corporation
**stock: the capital raised by a corporation through the issue of shares entitling holders to an ownership interest (equity)
Compared to these changes in the global market, Korea's stock market is rebounding much stronger than other major countries around the world in the midst of a pandemic, and is leading the way in Asia with foreign investment inflows into the bond* market. Investors judged that Korea, which successfully responded to Corona19, would recover much earlier and more robustly than other countries. However, the risk is still high as this recovery is due to psychological factors. During the first 20 days of April, Korea's exports fell 27% from the same period last year, and the Korean economy has suffered the worst since the first quarter of 2008.
*bond: an amount of money that an organization or government borrows and promises to pay back on an agreed date with an agreed amount of interest, or the document that contains this agreement
There should be a lot of worries from college students preparing for employment that the global economic downturn will be prolonged. Nonetheless, I wish Sangmyung University's students to grow as talented people who steadily adapt to the trends of each industry.
Sources:
https://www.stlouisfed.org/on-the-economy/2020/april/impact-social-distancing-ripples-economy
https://www.imsn.kr/news/articleView.html?idxno=1784
https://www.ifs.or.kr/bbs/board.php?bo_table=News&wr_id=2791
https://www.ifs.or.kr/bbs/board.php?bo_table=News&wr_id=2792
https://www.ifs.or.kr/bbs/board.php?bo_table=News&wr_id=2793
https://www.huffingtonpost.kr/entry/investor-flock-to-south-korea-coronavirus_kr_5ea287f2c5b6f96398126c78
http://www.eroun.net/news/articleView.html?idxno=11190
https://www.bbc.com/korean/news-51749042
https://www.statista.com/topics/6170/impact-of-covid-19-on-the-global-financial-markets/
https://www.bok.or.kr/portal/bbs/P0000528/view.do?nttId=10057570&menuNo=200434
https://www.shutterstock.com/ko/image-photo/graphs-representing-stock-market-crash-caused-1658501806
