Measures to contain the coronavirus pandemic have caused the biggest shock to modern life in almost a century and the ensuing economic collapse will outstrip any since World War Two, according to management consultancy McKinsey.
Governments have responded to the pandemic by closing borders, enforcing quarantine procedures, and shuttering businesses in a bid to prevent the coronavirus, officially known as COVID-19, from spreading. The economic impact of these activities will be disastrous, with experts and McKinsey predicting up to a 40 percent drop in annual gross domestic product (GDP), a measure of the total economy, during the second quarter of this year.
This economic decline also has serious health repercussions, as many studies have shown that a falling economy leads to an uptick in deaths by numerous different causes.
“The answer cannot be that we accept that the pandemic will overwhelm our healthcare system, and thousands, if not millions, will die. But can the answer be that we cause potentially even greater human suffering by permanently damaging our economy?” McKinsey said in the report.
The report outlined numerous scenarios measuring public health response to economic policy responses.
Even in the firm’s most optimistic scenarios (A1-A4), a sharp decline in annual GDP is expected in the second quarter of 2020, with US and European GDP falling between 25 and 30 percent. Some sectors under threat in particular are automobiles, falling 50 to 70 percent; airline and transportation, falling about 70 percent; and the services sector, falling between 50 and 90 percent.
The coronavirus will also likely cause a 40 to 50 percent drop in discretionary consumer spending, leading to an immediate 10 percent drop in GDP before any additional effects are counted.
“That’s not only unprecedented in modern history, it has been historically almost unimaginable – until now,” the report said.
In its worst-case scenarios, the firm estimates annualized GDP could fall 35 to 40 percent in the second quarter of 2020 in the US and Europe. For reference, the largest quarterly decline in GDP during the disastrous 2008 financial crisis was in the fourth quarter of 2008 with an 8.4 percent drop. It would take US and European GDP more than two years to recover in this scenario.
Governments have responded to this unprecedented threat by opening up state coffers and promising aid to businesses and individuals. The US Fed has taken the extraordinary move of announcing that the limit to its debt-buying program to support the economy is virtually without limit, while the US Congress recently passed a $2.2 trillion stimulus program.
In the Middle East, central banks have pledged over $120 billion in stimulus packages so far. Experts have praised the speedy response by central banks.
“The central banks have responded immediately, no delays. That’s about the best thing that could happen… The central banks know what they have got to do, I think the governments know what they have got to do. And we'll worry about paying for it later,” said Professor Stephen Thomas, associate dean, MBA programs at Cass Business School in Dubai and London.
Source: McKinsey/Oxford Economics
Life under lockdown
Governments have broadly moved to contain the virus with a set of broadening measures designed to limit human interaction. Borders are closed, and many businesses are shut, often without an end in sight.
“The longer a lockdown is in place, the worse the impact on our lives will get … the impact of extended lockdowns for many, many people will be nothing short of catastrophic,” the report said.
In China and other East Asian countries, extensive lockdown measures have broadly resulted in cutting the number of infections and controlling the coronavirus’ spread. In Western nations, however, lockdown policies have been viewed as draconian, and have “so far been narrower, less vigorous, and not as effective,” the report said.
McKinsey proposes that authorities should move much faster in enacting clear behavioral guidelines, such as widespread testing and altering businesses models. Doing so would “allow authorities to safely release some parts of the blanket lockdown measures that choke our livelihoods today.”
Enforcing these guidelines may well save livelihoods, avert economic crisis, and control the coronavirus pandemic, but will be hard to do.
“How do we get everybody to accept the consequences of creating and implementing such behavioral protocols? The areas of sensitivity are many, including our personal freedoms, right to privacy, and fairness in access to services. There are no uniform answers to these issues … Each government will need to find effective, yet socially acceptable ways of enforcing these measures and new protocols,” the report said.
Life after COVID-19
But what happens to economies after the world is deemed safe to come out of quarantine? In China, lockdown measures have recently began to lift.
“With a little bit of luck, China will undergo a sharp but brief slowdown and relatively quickly rebound to pre-crisis levels of activity. While GDP is expected to drop sharply in the second quarter of 2020, some signs of normal life are returning in Beijing, Shanghai, and most major cities outside Hubei,” the report says.
China’s GDP growth for 2020 would end up roughly flat, eliminating the 6 percent growth that was expected at the beginning of the year, but by 2021, China’s economy would be back to its pre-crisis trajectory.
In this scenario, if the virus is contained within two to three months in the US and Europe, monetary and fiscal policy will help mitigate some economic damage so that these economies may bounce back toward the end of the second quarter of 2020.
“Even in this optimistic scenario, however, all countries would experience sharp GDP declines in the second quarter of 2020, most of which would be unprecedented,” the report said.
The authors also outline a much darker scenario in which countries fail to contain the virus and fail to mitigate the economic damage.
“In this more pessimistic scenario, China would recover more slowly and would perhaps need to clamp down on regional recurrences of the virus. It would also be hurt by falling exports to the rest of the world. Its economy could face a potentially unprecedented contraction,” the report read.
In the US and Europe, if containment fails now, they may be forced to implement quarantines and social distancing through the summer, which would wreak havoc on economies in these countries.
“We are not writing to predict that this will happen but rather to issue a call to action: to take the measures needed to stop the spread of this virus and the damage to the economy as quickly as humanly possible,” the authors wrote.
Another report by McKinsey, “Beyond coronavirus: The path to the next normal” notes that a shock of this size will shift the preferences and expectations of individuals as citizens, employees, and consumers. These shifts and their impact on “how we live, how we work, and how we use technology” will become clearer in the coming months.
But in this uncertainty lies opportunities to explore new uses of technology when labor is unavailable. Businesses will have to reevaluate production costs. Health care systems will need to determine how to meet surges in patient volume, and public health approaches in an interconnected world will need to be revisited.
Governments are more likely to take an active role during this time, the report suggests.
“Institutions that reinvent themselves to make the most of better insight and foresight, as preferences evolve, will disproportionally succeed. Clearly, the online world of contactless commerce could be bolstered in ways that reshape consumer behavior forever,” the report read.
Another effect could be the end of supply chain globalization if production and sourcing move closer to the end user.
“The aftermath of the pandemic will also provide an opportunity to learn from a plethora of social innovations and experiments, ranging from working from home to large-scale surveillance. With this will come an understanding of which innovations, if adopted permanently, might provide substantial uplift to economic and social welfare— and which would ultimately inhibit the broader betterment of society, even if helpful in halting or limiting the spread of the virus,” the McKinsey authors wrote.SHOW MORE