COVID-19’s Impact on the Global and US Economy

• COVID-19’s economic costs have been rising. The pandemic had a negative impact on the global and US economy.
• The pandemic has both short term and long-term implications for the global and US economy.

The COVID-19 pandemic is a bigger economic challenge than a health challenge. There are several ways to gauge COVID-19’s impact on the global and US economy. On a very macro level, we can gauge the impact by the fall in the US and global GDP due to the pandemic. The IMF expects the global economy to fall 3% this year. Notably, the IMF expected the global economy to expand by 3.3% in 2020 before the pandemic.

The pandemic could shave off 6.3% from the global economic growth this year. Overall, the global economy is roughly $86 trillion. Going by the IMF’s estimates, COVID-19 would cost the global economy around $5.4 trillion this year. However, the situation isn’t that simple. First, some of the lost economic activity in 2020 might be back in 2021. Also, even the 3% expected contraction in global GDP growth looks like a fairly optimistic scenario.

The IMF expects the US GDP to contract 5.9% in 2020. Before the pandemic, the IMF expected the US economy to grow 2% this year. Based on the IMF’s calculations, the COVID-19 pandemic would cost the US economy almost 7.9% of its GDP this year or around $1.7 trillion for the US economy. The US GDP was roughly $21.5 trillion at the end of last year. Meanwhile, the US government has come up with a massive stimulus to address COVID-19’s economic impact.

According to the IMF’s calculations, the global fiscal support to address the COVID-19’s economic impact is $9 trillion. The direct budget support is $4.4 trillion, while the remaining $4.6 trillion is towards loans, equity infusions, and guarantees. In the US, the House passed another $3 trillion stimulus bill. However, the bill still has to go through the Senate.

Fiscal spending would lead to another increase in the global debt-to-GDP ratio, which was at record highs last year. Increased government debt would be a long-term economic impact of the COVID-19. Some of the emerging economies would struggle in the coming years as their interest outgo would increase. While rating agencies might take a lenient view of higher fiscal deficits, we can’t rule out rating downgrades for some of the countries.

We can quantify the hard data points like the stimulus, GDP contraction, and even the fall in stock markets. However, the COVID-19 pandemic might have a structural impact on the US and the global economy. First, the unemployment levels might take years to reach the pre-pandemic levels. Some of the job losses might be structural.

The COVID-19 pandemic has added another angle to the US-China rivalry. The Phase One trade deal was a mere short-term truce in what now looks like Cold War 2.0. After the pandemic, companies might look to diversify their production from China. Some of the production might come back offshore to developed economies. However, given the cost arbitrage, some production would move to other Asian companies.

In response to COVID-19’s economic fallout, the US and global central banks resorted to unprecedented monetary easing. Notably, it took seven years for the Fed to embark on rate hikes after it lowered rates to zero bound in 2008. Many people expect interest rates to go negative in the US tracking the European Union and Japan. However, negative interest rates have their own repercussions for the US and the global economy. Lower and maybe even negative interest rates might be here stay for good.

The macro risks for investors might increase in a post COVID-19 world. However, US stock markets have shrugged off the pandemic fears, which is evident in the sharp rally. The Nasdaq Composite Index (NASDAQ:QQQ) has turned positive for the year, while the S&P 500 Index (NYSEARCA:SPY) is down only about 8.7%. US stock markets don’t seem to reflect COVID-19’s economic impact. Most fund managers however caution on the valuation aspect. Read US Stock Markets Are Overvalued, Chorus Gets Louder to learn more.