The ongoing coronavirus pandemic has triggered unprecedented restrictions not only in terms of social distancing measures but also in a wide range of economic activities as countries all over the world declared national emergencies. At the same time, the alarming transmission rate has strained notional healthcare systems. Over one hundred countries have had to close their borders in the past months, which has disrupted global supply chains, international trade and the tourism sector. Millions of people are in fear of losing their jobs or have already lost them.
The service industry has also been affected, especially jobs that involve a lot of physical interaction like retail, hospitality, leisure and transportations services. Put together, they make up about a quarter of jobs in developed economies. Market volatility has exceeded the levels during the global financial crisis, while equity markets and oil prices are plunging.
The negative impact of these prolonged restrictions in developed countries has spilled over to developing countries. As consumer spending in the United States and European Union decreases, so does the demand for imports from developing countries. Global manufacturing production has also taken a hard hit, and many companies from the automobile, telecommunications and consumer electronics industries are facing shortages of components they used to get from countries like China, so they’re suspending activity on a large scale. For instance, more than half of exports from the Dominican Republic, Haiti and Mexico usually go to the United States, and 60% of exports from Morocco and Tunisia go to the European Union. A slump in demand in these two economies translates to significant downturns in countries heavily reliant on trade relations with them.
Developing economies that depend on tourism for revenue have been negatively affected by international travel restrictions, and we need to keep in mind that the global tourism sector employs more than 123 million people. This threatens the livelihood of vulnerable segments of society, such as low skilled workers.
“Swift and decisive policy measures are needed to protect those who are most at risk – such as low-income families – from financial ruin.”
Growing debt distress and the possibility of a debt crisis are pushing policymakers to reduce public expenditure while they need to ramp up spending to contain the pandemic. Other governments are rolling out or considering rolling out substantial stimulus packages to keep the global economy from plunging into a deep recession. Swift and decisive policy measures are needed to protect those who are most at risk – such as low-income families – from financial ruin. For example, according to the Canadian Payroll Association, last year 43% of Canadians were living paycheck-to-paycheck. This is an alarming result, which suggests that, amid the coronavirus financial impact, debt relief in Canada will be thoroughly sought after.
The magnitude of the pandemic’s economic repercussions will depend on two factors: the duration of restrictions in major economies and the effectiveness of fiscal responses to this crisis. Stimulus packages that are well-planned and well-executed may be able to not only limit the spread of the virus by prioritizing health spending but also provide financial support for low-income families and other vulnerable segments of the population.
Unfortunately, the current coronavirus crisis is destabilizing a global economy that was still recovering from the Great Recession of 2008. Although on average household income had increased in the OECD (Organisation for Economic Co-operation and Development) area by 6% since 2010, countries like Spain and Italy hadn’t had enough time to recover, and they were among the most impacted by the outbreak. In fact, since entire sectors of the economy have had to hit the brakes and large parts of the population are house-bound, the current crisis may have a worse outcome than the 2008 recession. In the OECD, 1 in 3 people are considered financially insecure – they may not be poor when we look at their income, but they don’t have enough savings to keep their families from falling below the poverty line for more than three months if they lose their jobs.
The limited financial buffer is especially risky for couples with children, young people and people with qualifications below tertiary level education. Single-parent households have to struggle not just with the loss of income, but also with the lack of family support and difficulties with childcare because of school closures.
Those with enough savings will use them to support their families through this income shock, while others have to either cut their spending or rely on personal loans. For the 20% poorest households in OEDC countries, essential expenses such as groceries, rent and utilities make up about 75% of their income, so it’s unlikely that they would have enough savings to carry them through. Middle-income households will also struggle because many of them tend to spend more than they earn. Debt is actually more widespread in middle-income families than among low-income families since debt is used to increase net worth. This leaves us with a wide range of households that are likely not to have adequate resources to cope with serious financial strains, making policy measures like rent deferrals and tax payment freezes necessary.
“Teleworking may have reduced some of the economic consequences inherent to social distancing, but…”
Teleworking may have reduced some of the economic consequences inherent to social distancing, but they can be applied to only a small part of workers that must now juggle additional responsibilities like caring for their children or older relatives. Before Covid-19, data shows that teleworking was mostly limited to workers with higher incomes like managers and public administration employees. Even so, only about 30% of them were allowed to work from home if needed. Under the current circumstances, the total number of individuals working from home may be lower because we have to consider company closures. Having said that, it’s clear that the coronavirus outbreak has prompted more considerable investments in extending teleworking opportunities and infrastructure, which may prove beneficial in the long-term.
Of course, this is little consolation for those who are not able to perform their job duties remotely. Let’s take the United States as an example. Americans with low-income jobs – nannies, line-cooks, grocery store clerks, nurse’s aids etc. – can’t work remotely and are less likely to get paid sick days. They’re more likely to be uninsured and underinsured, and because of income limitations, they may have trouble even stocking up their pantry. Many children from low-income families depend on the breakfast and lunches they get from school for free or at a reduced price. Once schools are closed, their parents can’t afford child care, and they may not have access to high-speed internet to take advantage of virtual learning platforms.
