The economics of fear: how coronavirus will change business and consumers

The coronavirus epidemic in the world can change entire industries and patterns of behavior of companies and consumers. The transition to online shopping can be a long-term trend, as well as the transfer of employees to a remote mode of operation.

The global economy is more affected by the number of people who are afraid of the COVID-19 coronavirus than the number of cases. Fear changes people’s behavior. And it changes the behavior of those who make decisions. Fear of the virus is changing supply and demand in the global economy. The proposal is affected by the suspension of production in China, which reduces global production.

Today, China’s share in the global manufacturing industry is about 25%. In 2003, when SARS was rampant, this indicator in China was only 11%. Today, China is a link in global supply chains. So stopping production in China will reduce economic activity in the world, and also affect the performance of other companies in the supply chain.

Of course, the business was concerned about the volume of stocks. During the lunar New Year period, companies using Chinese components may have more stocks than at other times of the year. It is possible that someone could change the supply chain, although last year’s trade conflict between the United States and China showed that this takes time. These measures will help mitigate the impact of the suspension of work in China, but not fully compensate for it. Technology can mitigate some of the problems. Someone can work from home, economists, for example. That is, part of the global economy is able to work even in quarantine. This does not cancel the negative effect, but it is a way to reduce it.

And what happens to demand? Fear has reduced the demand for certain services. In China, people stopped going to shopping centers, cinemas, etc. The demand for travel fell all over the world. At the same time, online trading is gaining momentum in some places. And the demand for online computer games in China has grown by 40% year on year.

Not the same issues for currencies

When it comes to currencies though, it’s hard to say that the pandemic will do anything bad to the largest ones such as USD, EUR, and JPY. Statistics show that fx trade volumes have increased significantly during the pandemic, but mostly in the “selling” department of exotic currencies.

This may alter the economy as well, but will most likely introduce changes only for the smaller currencies.

Distractions

People who are at home with their family all the time need to be distracted by something. The online economy is a great distraction. This is one of the key differences between the current situation and the times of SARS. The growth of online shopping will reduce the impact of the epidemic on demand. The effect as a whole is still negative, but it is weaker than in the past, thanks to Amazon, Netflix, and online games. The impact on the demand of a company depends on what it sells. Luxury brands are suffering. Such products are bought personally, and not on the Internet. Going to a luxury store is part of the pleasure of shopping. But for basic products, the transition to online shopping can be a long-term trend.

For emerging markets, the effect of coronavirus is to reduce resource demand. Declining demand for raw materials such as copper can recoup losses as production resumes. This demand will support prices in the future. But with energy, everything is not so simple. A canceled flight will remain canceled. China is a large and not very efficient consumer of raw materials. A decrease in China’s GDP by $1 per capita has more severe consequences for global resource demand than, say, a similar decrease in UK GDP.

This is also important for world inflation. The overall outcome of the epidemic is likely to be a decline in global inflation. This is because reduced demand for raw materials leads to lower prices for it. A smaller demand for services is also likely to lead to lower prices for them, at least in the short term. Problems in supply chains, in theory, can raise the price of finished goods.

However, the business is usually not in a hurry to raise the price of goods if supply problems are temporary. If a company expects the virus to cause problems for a month or two, it is unlikely to upset buyers by raising prices for such a short time. It is worth noting that during the trade war between the United States and China, American companies generally did not raise selling prices to pay trade duties.

Corona-virus can make long-term changes to the economy. It is hoped that the virus will begin to weaken in a few weeks. And when the epidemic begins to subside, the fear of the virus will also decline.