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The Global Economic Impact of Coronavirus

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The Global Economic Impact of Coronavirus

Introduction

Since the first case of COVID-19 was detected in China, there have been a lot of changes in both economic and social lifestyles in China and the world at large. Economists pose that the spread of the Pandemic viral disease is likely to cause an economic recession if not addressed in good time. Business institutions as well as governments are hit with shock and fear. Economists, for instance, have made forecast that China is likely to suffer a great deal of economic loss from the outbreak of the Pandemic. Furthermore, a survey conducted by the New Bank of America fund managers indicated that the economic effect of coronavirus on China shall take at least five years to be corrected. The financial pundits opined that the effect of the devastating Pandemic would see China’s GDP drop to about five per cent for the next five financial cycles. This is a great drop in GDP.  In China, the Pandemic has reduced the labour supply due to self-quarantine, thereby making it difficult for businesses to operate. The most hit sector is the global market and international travellers. Concerns have been raised on the sustainability programs for China’s global supply chain networks (AmCham Sanghai, 2020). No doubt, there are fears that if the condition persists for a while longer then the motor industry will be hit hard since the supply for car parts shall have been cut. Apple has sent a warning of imminent shortage in supply of its iPhones due to the closure of its Chines franchises. At the same time, IATA, the global body for international airline business has indicated that there is a drastic drop in the passenger demand following the outbreak of COVID-19. The drop in international travels is said to have robbed the airline industry approximately 30 billion dollars in 2019. The conditions are even worse in 2020. Generally, the outbreak of the disease has caused panic on businesses. Some firms have closed down their operations while others are recording huge losses. The hospitality sector is one of the big losers (KPMG 2020). The following research seeks to bring to perspective how this Pandemic is affecting the global economy with a focus to its impact on international trade, the financial, economic crisis, the tour and travel business as well as retrenchment of employees due to closure of businesses across the globe.

How the Pandemic has affected the Global Economy

The spontaneous spread of the coronavirus and its high rate of infection has led to the development of fears around the globe. The global economic activities have since been disrupted by the spread of the deadly and highly contagious disease. The Organization for Economic Cooperation and Development (OECD) (2020) advised that the outbreak of the Pandemic has had the effect of declining the global economic growth by 0.5% from the present 2.9% to 2.4%. According to OECD, this is an unprecedented decline that exceeds even the 2008/2009 financial recession.  Economists and around the globe assert that the outbreak of the Pandemic has affected the economies both the developed and developing nations in different dimensions as discussed below.

Impact of COVID-19 on International Trade

The outbreak of the virus has led to the establishment of some stringent measures that are majorly unfriendly to economic activities. It has caused lockdown in several countries around the globe. The activities of business corporations; especially financial issues have been affected adversely by the advent of the novel coronavirus. The report by world health organization about the Pandemic has created negative effects on the routine business operations. In light of financial accounting, the spread of coronavirus pandemic has the potential of delaying the reporting and even preparation of financial statements.  The lockdown commenced in China, and has since spread out to several other countries. The lockdown has curtailed international trade since the movement of people is prohibited. The supply chain and the logistics business have been adversely affected by the outbreak of the Pandemic. The global supply chain has thus suffered a blow. The ripple effect to this is shortages of necessary items in the global markets since they cannot be ferried from their sources to the target markets.

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The export/import businesses have equally been halted following the stringent measures put in place by different countries to help check the spread of the Pandemic. World Bank reports on the effect of the Pandemic on global trade indicate that the current scenario created by the Pandemic shall cost the world one trillion US dollars (AmCham, Sanghai, 2020). There is looming shortages of several commodities in the global market following the disruptions of the global supply chain. Shops and business corporations have been faced with hard economic times (Intel 2020). A case in hand is the drastic cut of sales forecast by Apple following disruptions in its supply chain. Across the Asian continent governments and economic entities have downgraded their economic growth prospects following the outbreak of the deadly virus. Most notable is the fact that the persistence of the Pandemic might cause economies to scramble down to their knees. Furthermore, the Chinese motor vehicle sector is equally suffering since the supply of the spare parts has been cut. Though the Chinese automobile sector is still struggling, the weight is too much since there are no employees reporting to work thus making it quite cumbersome to manage businesses properly. The resultant effect is that the outbreak of COVID-19 has seriously jeopardized the operations and activities in the economic sector.

The lockdown has the effect of reducing the demand for the commodities supplied in the global market due to a reduction in the number of potential traders. Consequently, following the lockdown by different governments, there has been a drastic drop in the prices of several commodities in the global market. The demand for oil has declined following the outbreak of the coronavirus. OECD (2020) reports that by March 11, the prices of crude oil had declined by 48 per cent to USD 33 per barrel. It is indicated that countries that depend on China for most of their products have begun experiencing difficulty due to shortage of commodities in the markets following the lockdown effect.

Financial and Commodity Markets

The continued spread of the virus has converted most of the investors in the securities exchange to net sellers. Consequently, all the gains that might have been made from the Forex business have been whipped out by the outbreak and the continuous spread of the Pandemic. Most investors have withdrawn their funds from the foreign exchange markets to safely deposit them in relatively safer commodities like gold for fear of potential slump of the Forex market. Besides, the collapse in the prices of crude oil has contributed further to destroy the stock markets. Most investors have resolved to withdraw their funds from the stock market and invest them in the energy sector due to the affordability of the commodities in the hope that the prices will stabilize again and yield more meaningful profits.

Tour and Travel Industry

The tourism sector, construction, retail businesses, and groceries are some of the sectors that are feeling hard hit from the effects of the coronavirus. Following bans on international air travels by most countries, the International Air Transport Association (IATA) predicted that the outbreak of COVID-19 should cost the airline industry a loss in revenue of up to 113 billion US dollars (Joppe, 2020). This projection was arrived at following the decline in the number of individuals taking part in international trade following the lockdown directives affected by most countries. Most of the airliners have been forced to scale down their flight capacity that translates into a loss since services are perishable and fragile to the extent that an opportunity forgone cannot be fulfilled. The decline in the number of travellers has seen British Airways cut off its flying capacity by three-quarters resulting in a massive loss in profits. At the same time, hotels and hospitality industries have been hit in equal measure by the Pandemic. There are fewer people travelling for adventure during this period. This has seen a drastic drop in the number of people booking hotels, and visiting parks and museums. Report by ICAO indicates that countries relying on tourism as a mainstay to their economy are seriously affected by the Pandemic. Further, the report by ICAO indicated that the Pandemic would result in approximately $1.3 billion of tourism revenue losses to Japan due to a decline in Chinese travellers. At the same time, Thailand is projected to lose at least $11.15 billion dollars. The trend cuts across since most countries have closed their airports, thereby curtailing international travels (Joppe, 2020). Most countries have also mounted border point surveillance to minimize entry of infected people into their territories.

Effect on Disposable Income and Employee Retrenchment

The outbreak of the Pandemic has seen several companies close their operations due to lack of customers. At the same time, some companies are scaling down their operations and consequently lying off some of their employees. Other measures taken by employers is drastic pay cut. The net effect of these operations is a drastic drop in the disposable income of the employees. The decline in income of employees and the general public has the ripple effect on the purchasing power and the NDP and the GDP of the nations in the long run (Berdad, et al. 2020). The UK government announced radical fiscal response measures that included, among other things a compulsory pay cut by 20 per cent on every employee to help in managing the Pandemic. In Denmark the government announced it would help the private companies that intended to retrench some of their employees by paying 75% of their salaries. Following the outbreak of the Pandemic, there has been fear and panic regarding job security to most employees. In the USA, for instance, more than 6.6 million people are on the verge of losing their jobs (Carlsson-Szlezak, Reeves, & Swartz, 2020). In Spain, the outbreak of the COVID-19 has led to the retrenchment of about 900,000 people. In Africa, it is approximated that more than half of the jobs are at risk of being scraped off, and the employees lay off due to the outbreak of the COVID-19. The COVID-19 outbreak has thus reduced the income distributions to most households and therefore reduced their spending habits as well. In the global level, this would lead to a decrease in the GDP of the world.

Macroeconomic Indicators

The coronavirus pandemic has slapped the economic market by causing an economic standstill. Following the Pandemic, global economic growth is likely to be affected adversely by the outbreak of the Pandemic. The 2020 global economic progress is likely to be slow with several hitches due to the adverse effects caused by the COVID-19. Central Banks of most countries are obliged to take dovish fiscal and financial measures in a bid to boost their economy amid the spread of the Pandemic. Some governments have thus given out financial aid to their people while others have reduced the rates of interests on the loans borrowed. Yet again, some nations have reduced the taxes levied on their employees as mechanisms to manage the tough economic situations created by the Pandemic (KPMG 2020).

The Impact on Accounting and Fiduciary Management

The outbreak of the Pandemic may oblige companies to set aside funds for dealing with the Pandemic, thereby reducing the amount of capital invested in the business directly. Additionally, the cases of coronavirus may also interfere with the validity of the forecasts since it makes it difficult for the accounting team to make a justifiable assessment of market trends.  The effects of coronavirus re far-reaching even to the managerial accounting as well. The Pandemic has the potential of interfering with business transactions such as contracts, due to illness of the parties involved in the daily management and administration of the company operations. It may also make the employees working in the accounting department as well as other departments sick and therefore ineffective in discharging their duties as expected. The Pandemic may also affect management accounting in several other ways. Kien (2020)posit that it poses a big challenge in due diligence in evaluating the various ways the virus may affect the operations of the business.  It also puts the managerial accountants on a tricky state to advise the directors on the risks associated with the Pandemic. Again it also puts the financial managers under the risk of disclosing the undisclosed liabilities relating to the virus, the status of the material contract and monitoring and control mechanism.

Conclusions

In light of the information discussed in this paper, the outbreak of coronavirus has severe economic and financial implications that may adversely affect the performance of the individual firms as well as accounting activities. The outbreak of coronavirus will see several countries suffer economic hardships because of the negative implications it has on economic activities. Lockdowns and travel bans have negative effects on the global economy (Sabatini et al. 2020).

References

AmCham, Sanghai (February 17, 2020). Supply chain and factory openings. An AmCham  Shanghai Mini Survey.

Berdad, J. et al. (March 4, 2020), Coronavirus/COVID-19. Skadden

Carlsson-Szlezak, P., Reeves, M & Swartz, P (March 3, 2020). What Coronavirus Could Mean for the Global Economy. Harvard Business Review

Chatfield, Michael; Richard Vangermeersch (2014). The History of Accounting: An International Encyclopedia. Routledge

Intel (March 9, 2020). Intel supplier communication. Intel

Joppe, M. (February 5, 2020). Trapped tourists: how is the coronavirus affecting travel? World Economic Forum

Kien, T. H. (February 2020). In brief a look at current financial reporting issues Release Date:      February 2020 Accounting implications of coronavirus. PWC

KPMG (February  2020). Financial reporting hot topics: Coronavirus. KPMG International           Group

OECD (March 2, 2020). Coronavirus: The world economy at risk. OECD Interim Economic Assessment

Sabatini, M. et al (2020). Coronavirus: Accounting considerations for your business. PWC

 Tuovila, A. (January 28, 2020). Accounting. Investopedia

 

 

 

 

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