Covid-19 gives global economy the shivers

In what seems the blink of an eye, the world around us has changed beyond recognition. In countries as far apart as China and Italy, streets have emptied with only the occasional delivery rider who has the street to himself. In Paris, the famous roadside cafés have shuttered — that didn’t happen even when the Germans paraded down the Champs-Elysees in World War 2. Even the Taj Mahal is closed.

The only question now on everyone’s minds is how quickly can the virus be tamed and will we quickly be able to return to life as it was before? Or will the damage be so heavy it will take years to recover? The portents aren’t great with the same scenarios being played out across the world: governments being caught flat-footed, events cancelled and people self-isolating or under lockdown.

Can Indian firms, many already financially shaky after a difficult decade, withstand this global medical crisis?

Airlines in a tailspin

The first industry flying into headwinds has been, of course, the aviation industry. Around the world, airlines are grounding planes and asking staff to take leave. With India closing its borders to the EU and Middle East countries, Air India and Indigo have cancelled international flights.

British Airways has already said 75 per cent of its fleet won’t take off in April and May while US airlines are reportedly considering the unthinkable: halting all domestic air travel amid worry about the virus’s spread.

Head eastwards, and with the Chinese market shut for business, Cathay Pacific was one of the first airlines buffeted by the turbulence. It grounded three-quarters of its fleet. But this is where the story plays out differently. Cathay’s now scrambling its flight crews and putting planes back on its old routes.

That’s a hopeful sign the global economy might rapidly kick-start back to life, if the pandemic somehow ends faster than most people expect. Incidentally, Hong Kong’s been a bright star in the global coronavirus firmament with only 105 cases and two deaths. China’s also trying to restart its economy.

In the meantime, as countries close, it’s inevitable the aviation industry faces a colossal beating. Aside from India closing its borders, Canada’s banned all travellers except Americans. The US has stopped all UK, European and China flights. Also, 30 per cent of the passengers on the Gulf airlines are from India so this will be a sharp blow for them. With this scenario, can airlines stay ahead of their creditors?

Says global aviation consultancy Capa: “Many airlines have probably already been driven into technical bankruptcy, or are at least substantially in breach of debt covenants” and will need substantial government help to stay aloft. Alternatively, it predicts a brutal shakeout with only a handful of flush-with-funds groups remaining in the skies. IAG, which owns British Airways for instance, has strong cash reserves but the airline says it’s in “a fight for survival” and will have to cut its 45,000-staff payroll.

The airlines supply the passengers who use the hotels, restaurants and taxis in the countries they visit. Without travellers, these industries will swiftly shudder to a stop, bringing layoffs in their wake, hitting not only Indian states like Kerala and Goa but neighbouring Sri Lanka, Nepal and the Maldives which are heavily reliant on tourist spending.

Turn from travel and hospitality to retail and restaurants. Here, too, governments around the world are shutting down almost all but stores selling essential commodities in a bid to stop transmission of the highly contagious virus.

In Italy, Spain and France, for instance, lockdowns are already in force and the same measures are coming into effect in countries like Germany. Even in the US, which has been laissez-faire in responding to the pandemic, malls and stores are shutting fast as people self-isolate. Chains like Apple and Nike have closed their stores and sent staff home. Other less affluent companies are simply sacking staff, saying they have no other option.

Stock markets tumble

All of this has resulted in the stock markets tumbling globally. A US Fed rate cut to essentially zero did nothing to stall the crash on Wall Street which has erased 90 per cent of its gains during the Trump presidency since the coronavirus surfaced. The same story’s playing out in India and other parts of the world. While India has stalled on an expected rate cut, it looks as if monetary easing won’t work in the current situation.

Lowering borrowing costs can’t make consumers buy in these trying times. Aviation, retail and hospitality are among frontline industries taking an immediate beating.

But the effects of the spending collapse will spread far and wide, hitting India’s mobile phones, TVs and the already struggling automobile industries.

The fact is huge numbers of people in India and worldwide will find themselves out of jobs in the coming months. This will be at all levels of society, but it will impact most brutally people who don’t have a safety net as in India or in countries like the US.

Words like steep recession, credit crisis and even depression are on economic forecasters’ lips. Moody’s warned last week that nearly 80 million jobs in the US economy are at risk, more than half of 153 million jobs in the economy overall. What’s the way forward to prevent a global economic collapse?

The way ahead

Here, the Danish government is leading the way, promising to cover 75 per cent of employees’ salaries for three months if firms keep them on payrolls.

“If there’s a big drop in activity and production halted, we understand the need to send home employees. But we ask you: ‘Don’t fire them,’” Denmark’s Prime Minister Mette Frederiksen said. France is promising “unlimited” state financial aid for businesses.

Another proposal has come from a most unlikely quarter in the US. Republican former presidential candidate Mitt Romney, nobody’s idea of a radical firebrand, has urged the government to allot a flat $1,000 to all adults to ease hardship. Similarly, the more left-wing ex-Democratic presidential candidate Kamala Harris has suggested emergency payments for poorer families.

Are such payouts possible in India where the fiscally strapped government is already in dire financial straits?

Certainly, if Covid-19 isn’t controlled fast, the government will need innovative solutions to ensure that supply chains keep running and the 1.3-billion population isn’t pushed to the wall financially which could give rise to civil unrest.

There’s also the matter of a badly underfunded healthcare system which will struggle to cope if the highly contagious virus reaches epidemic proportions in India, which has less than one hospital bed for 1,000 people and currently one of the world’s lowest testing rates.

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