What Can We Expect Post the Covid-19 Pandemic of 2020?

“Big economic disruptions tend to unsettle politics and create grievances and resentments across the globe”

China is bouncing back from the effects of the Covid-19 pandemic. According to The Economist, China’s economy, at the moment, is functioning at about 90% of its normal level. On paper at least, this 90% figure sounds quite promising, and seems like China has recovered to an extent. But in reality, this loss (rather, this shrinking of the economy) of 10% is worse than you think- it will prove to be catastrophic to many lives- with respect to their income levels and consumption patterns- thereby contributing to a wider economic problem. Moreover, this functioning rate of 90% could be what the entire world will have to look at, post these lockdown phases- irrespective of how nations have dealt with the global pandemic. As nations lift lockdowns, we are yet to figure out what life will be like, post this pandemic.

This economic shrink, as mentioned earlier, will prove fatal to thousands of lives across the world through rising unemployment rates. There might be a sharp decline in sales (and maybe profits too) of services offered by businesses because consumers still might not be willing to spend like they used to. A drop in consumer spending is naturally expected as of now, and it might take longer than we’d expect for things to be back to how they were till 2019. Let us look at a few numbers- For example, in China consumer footfall has recovered to merely half its level as compared to December 2019; hotel occupancy rates are still down by more than 50% and most importantly, 75% fewer people are traveling via flights- even though these figures should gradually improve, it’s not possible to say for certain whether it will be back to those previous figures considering there might come about changes (reforms/rules) after the pandemic is over as businesses and companies alter their work process. Taking an early morning flight just to attend a business meeting might become a thing of the past- we have to wait and watch. In other things, businesses with respect to hotels, malls, theatres, restaurants- are likely to take massive hit. The ‘entertainment’ industry sits on the edge owing to the pandemic; (these are the ways in which consumers tend to have ‘fun’ – according to experts, this dip in consumer spending will continue for an undefined time period, even after the lockdown is lifted and the pandemic is past us. For example, in Sweden, people had not been told to follow lockdown measures; however the Swedish consumer spending pattern reflected those of Denmark’s, where the daily restaurant turnover rates had fallen by 70%. This is because of uncertainty and scare among the Swedish people. All in all, the Danish spending rates fell by over 29% during the lockdown- the Swedish rates have not been far behind. (The Economist, 2020)

However, it is very important to understand that the true economic impacts of the lockdown and the pandemic will take time to unfold and reveal itself. But it’s certain that a decline in economic activity will contribute to the after-effects of the pandemic, and directly impact how our economy functions as a whole. Let us consider a small example- Mr. X owns a restaurant. You and I, as consumers, regularly dine at this restaurant. However, due to this pandemic, uncertainty towards the future has crept in, and we decide to cut back on this restaurant expenditure. Sales dip, potential profits take a hit too. As a result, the restaurant fires one or two of its employees and reduces the salaries of the other employees. Also, if these stores are unable to keep up with their rent, it means that the landlords are unable to keep up with mortgage payments- which in turn, leads to banks being left with debt that cannot be repaid! Now consider hundreds and thousands of businesses like these (especially the ones which deal in consumer services). It is a big deal, right? This, in turn, has a Domino Effect, as you can probably guess, and the aggregate demand within the economy falls. (A real life example would be that that of Burger King, who’ve admitted that they could not pay rent and had to shut a few stores = lost jobs and reduced consumption spending). Moreover, key economic factors indicate that the world is facing a recession already; for example, the unemployment rate, right now, in the US is the highest it has been, since the Great Depression of the 1930s. However, the main industry hit/ that will be hit by the COVID-19 pandemic is labour intensive- the people who are daily-wage workers and it is these people who are more likely to lose their jobs as time progresses.

The other after-effect of the COVID-19 pandemic across the globe: Finance as we know it, may alter.

This is not a case of China becoming Wall Street overnight , the crisis has provided China with an opportunity to show what it’s capable of doing, which in the long run will tip the balance of power. (The Economist, 2020)

Let’s get one thing straight from the start- America controls most of global finance. It has been like this since the World War II. It accounts for almost 25% of the world economy. The dollar ($) is the currency of international trade. Approximately, 80% of global supply chains use the $ for transactions- this is precisely what gives America significant power. On the other hand, China is the world’s second-largest economy with enormous banks. China’s banking sector has been growing steadily over the years whereas the US bank assets have more or less remained stagnant. As of today, Chinese banks have more assets than the ones in Europe. However, as of now Chinese banks account for only 7% of cross-border lending. It has not been able to influence the world’s financial system- not yet. But, China has been spreading its influence across the globe even during these times of lockdown and pandemic- China has been trying to fill the vacuum left by America in terms of global leadership. Also, the government bonds in emerging markets have shown a decline whereas the ones in China have remained stable over these months; this has helped in gaining trust in China’s economic capabilities. But China cannot hope to compete with the United States in terms of the SWIFT (because the US has influential power over it). 

Hence, China is looking at something else. Most payment services rely on American giants like Visa and MasterCard; but Chinese technological companies have developed innovations that disrupt the system: digital wallets. These can be used for anything and everything- without the money flowing though banks. This, infact, is a hardcore example of disruptive innovation and can hurt giants like MasterCard and Visa in the near future (Chinese companies like Tencent and Ant Financial- they have a couple of billion users and this pandemic might help increase its reach). They’re already expanding overseas: Alipay is accepted in 56 countries and regions as of now, and other digital wallet firms are buying into that technology. Hence the US has reasons to be worried about these Chinese companies. Let’s take a step back, nonetheless. China faces massive obstacles in its way, for now- the world distrusts its intentions because after all, as we know it, the Chinese initially denied and covered up the spread of the coronavirus. The financial system demands transparency, and it’s unclear whether China can abide by these rules. Whether or not China will be able to compete with the American giants by creating more competition- is a mystery only time will solve.