Right from the moment the World Health Organization (WHO) declared the COVID-19 or the Coronavirus outbreak as the global Pandemic, every sector has shaken its core existence. Even when we write this article here, few new cases are being reported in some parts of the world. So, experts suggest that also as China will recover from the bouts of this malignancy, the effects will still extend to the global plethora even in the next quarters, thereby creating more significant damage than imagined.
With every day marking a rise in the affected and the death tolls, the threat of the global Pandemic has given spillovers to every sector, and the downside risk will take a lot of time to recover. According to the chief economist of J.P. Morgan, Bruce Kasman, the global GDP growth will see a massive stall, which is the first of its kind outside a recession.
Material Disruption to the First Quarter of the Year
According to economists, the Federal Reserve is expected to ease 25 more basis points in their March Session in addition to the emergency reserves of 50 basis points cut in the first week of March. There is a 50% chance, though that the entire economy will return to their original belts. The good news is that by the end of 2020, there will be potential growth in the different aspects of the central banks globally, thereby easing the market to a greater extent. So, if the growing concerns of COVID-19 could be curbed down on time, at least 13 out of 22 sectors could emerge further with ease.
It won’t be wrong to state that the outbreak has impacted the economy brutally, and will continue its splurge further, especially for the markets of business and travel. Most effects that are seen on the airlines, airports, and the cruise industry while traveling internationally or even otherwise, are getting restricted increasingly.
Restrictions of Travelling of the U.S. Travelling
Considering the massive outbreak of the COVID-19, the Government of the USA has implemented strict traveling restrictions to contain the same within their borders. Foreigners are also temporarily denied entry in the country if they have visited China within the 14 days before visiting the country. Also, the citizens who have recently visited the Hubei Province of China and Iran within the last two weeks will be sent for a mandatory quarantine of 14 days.
Many airlines have suspended their flights to China, along with restricted flights to Japan and South Korea. The U.S. State Advisory Department has sent in travel advisory levels for the countries, including China, Italy, and specific regions of South Korea. The virus will be affecting the Revenue Per Available Seat Mile (RASM) in the first quarter of the year, and maybe the remainder of the year. It will not be unlikely that the cheaper fuel prices will still encourage travel and offset the losses incurred later.
Particularly after the first fatality reported in February, the Transatlantic and Pacific Capacity toppled down to a great extent considering the reluctance of people to travel anymore during the time of Pandemic, thereby resorting to hibernation. This has given the experts an assumption that Travel and Tourism of the USA will be impacted drastically in the coming days. This has impacted every aspect of the flights, even the frequent fliers, and has curbed down a substantial amount fo profit that otherwise proved to be fruitful for the economy.
The COVID-19 has impacted the major international airlines more than the domestic ones. As previously explained, the majority of international flights are either suspended or restricted. So, going forward, if the fatality rate of the local carriers rises, then these profit margins will be prone to more risk. Officials have already reported a decline of almost 100% flights catering to the demands of flying to and from China. This included about 75% decline to the entire TransPacific transaction. Apart from the major airlines, all other smaller airlines have suspended their flights and started providing travel waivers to their passengers already. They are also extending support towards allowing customers to travel further by changing flights without charging a fee.
SARS and MERS Outbreak Taught Valuable Lessons
The outbreaks of Middle East Respiratory Syndrome (MERS) in 2015 and the SARS in the year 2003 before the Coronavirus outbreak have already slowed down flying. However, the severity of the cases was found to be more impactful in the case of the SARS outbreak. It was a case where the maximum amount of traveling was cut down due to the risk of the national epidemic.
During the peak outbreak period of the SARS during March – April 203, the share prices of all the airline companies had seen a steep downslide, especially for all the Asian airlines and airports. According to the findings of the International Air Transport Association, Asian Airlines saw a significant downfall of 8% on their overall businesses that year. However, after the threat deteriorated by the end of the year, these airlines bounced back to business. They saw a massive recovery resulting in 37% growth, which was in line with the MSCI Asia that reported an increase of 38%, while the airports saw business for a whopping 51%. A similar scenario was observed from June through December 2015, where Asian Airlines and Airports reported a decline of 25% and 14%, respectively.
The Current Scenario
Following the massive outbreak of the virus in January 2020, flights and traveling have seen a tremendous downfall so far. Hundreds and thousands of flights were canceled so now, and the number is taking a steep rise every single day. Most of the international airlines are taking measures to suspend their trips to China for the next three to four months, while the European airlines are also following suit. The flight suspension is not only restricted to China but has also impacted the travel economy of Italy, South Korea, Japan, and Iran, thereby putting the entire situation in a dilemma.
Following the outbreak, the New Year already saw a massive drop in the number of air passengers. The Chinese authorities were also forced to suspend group travels as the air passenger traffic continued to drop dramatically, thereby making the figures to be 47% less than that of the previous year in a given month during the holiday period.
The continental belt of Europe is not far behind, with the Frankfurt Airport being exposed to the maximum number of exposure from China and Asia. Frankfurt Airport is the primary hub of the Asian domicile, has attracted more than 10% air traffic that includes around 4% population from China and Hong Kong. All the other airports are also impacted severely and reported to approximately 6.4% losses by now.
The Global Outlook
The advent of 2020 has practically shaken the global economy with the sudden outbreak of the Coronavirus pandemic, given that China plays a critical role in the global economic model. The country now accounts for 17% of the Global GDP. Although economists think that the shock could lead to a more significant impact on the global economy. At a time when fear factor plays a pivotal role in restricting mobility, sectors like entertainment, catering, offline retail sales, transportation, and tourism will be the most adversely affected by the outbreak.
The forecast for quick recovery still lies in vain as the calculated industrial activities have not been able to recover as forecasted. However, normalization is expected to resume with the first week of April with Q2 ready to bounce back and offset the loss of Q1 completely.
While the Coronavirus has compulsively proved to be an unexpected demand shock for the first quarter of the year, it will also be showing the trait of a notable supply shock for a prolonged period with factory shutdowns all around the world. The first-quarter GDP was previously forecasted to be at 6.3% growth, which is now revised to a contraction of 3.9%. However, economists are hopeful for having a more robust rebound in quarter two with a crackling 14.6% quarter-over-quarter adjusted growth. This would see the much-anticipated yearly growth of 5.2%. However, the same was 5.4% in the previous year. This, however, does not deny the potential negative impacts on health and other associated risks.
The Real Crisis
Without denial of the effects of the ongoing scenario, it will not be wrong to presume that even if the Pandemic seizes, its effects will be seen for a more extended period in the global scene. While the overall GDP of the world is expected to contract by 0.8% in the first quarter, the entire yearly GDP is expected to grow by 1.4% with a rebound of 2.25% in the second quarter.
So, it can clearly be stated that given the uncertainties of contagion, the pace of work might get hampered, but is expected to make a sizeable rebound by the end of the year. The markets are expecting an excessive recession risk and will take some time to stabilize themselves from this worst drawdown of the past 20 years.