The outbreak of COVID-19 pushing the world into a deep recession
The impact of the COVID-19 is having a serious bearing on the global economy. Many countries suffer from severe disruptions to trade and global value chains plus sharp capital outflows mounted with halted tourism and remittances receipts, price pressures for critical imports such as foods and medicines and tighter financing conditions. A sharp decline in export prices, notably for oil, will put additional pressure on exporters, while the unanticipated health spending needs and government revenue losses as a result of the economic slowdown will require large amounts of new financing. The sudden stop in the economic activity severely affects businesses, households, financial institutions, and markets. Many of the steps introduced by countries that host viruses, including forceful quarantines, the COVID-19 contagion was delayed by regional lockout, social distancing, etc., but economic activities were hindered. The pandemic has already led to mass panic in the world capital markets, posing a major danger to the new global financial system. The COVID-19 pandemic is expected to inflict massive casualties on the global economy equivalent to the Global Financial Crisis ( GFC) of 2008-2009.
Here are some balance of payments of some nations in detailed to emphasize the negative impact of the pandemic on the economy worldwide.
China’s BOP during COVID-19
Current Account - Goods Trade: The adverse effect of COVID-19 on China's market in products is expected to be the same magnitude as that of the Global Financial Crisis ( GFC) of 2008-2009. We forecast that overall exports will plummet by -16% this year, nearly at almost the same rate as the 2008-2009 GFC downturn. In the meantime, but at a moderate speed, import development would slide. Imports would also benefit from a range of deployed initiatives aimed at rising domestic demand and expenditure.
Current Account - Services Trade: China's gaping imbalance in trade in services has been a gaping imbalance for the last few years, primarily driven by the boom in overseas Chinese tourism. In 2019, 84% of the overall service sector deficit was compensated for by the shortfall in overseas travel. Since the outbreak of COVID-19, the lockout and border security measures were unveiled by several nations, which are doubtful to ease quickly. In February, China's foreign airline market was estimated to decline by about 60-70 percent. A development like this is expected to persist for much of the year. Consequently, we estimate that this year China's outbound and inbound travel will diminish by -60%.
Current Account - Primary and Secondary Income: Under Primary and Secondary Income, investment revenue flow is the dominant item. In principle, it may be influenced in all directions by the COVID-19 epidemic. Depressed economic operations would minimize foreign companies' investment profits in China and interest income received abroad by Chinese entities. The COVID-19 continues to minimize the net outflow of investment revenue if investment income flows from and back to China fall by the same degree.
The United Kingdom’s BOP during COVID-19
There was substantial instability and turbulence in global capital markets at the height of the outbreak of COVID-19. Any of these financial measures have since recovered after significant policy responses. Capital transactions have been impacted, as in past episodes of heightened volatility such as the global financial downturn and the euro zone debt crisis. It may be that we will see a transition from equities to other financial instruments that are perceived to be less volatile, such as bonds and gold, before there is more clarity about the future for the UK and the global economy. However, long-term economic instability may have created prospects for risky financial activity to boost gross transactions.
● Trade: Gross exchange movements into and out of the United Kingdom are expected to be affected, with the COVID-19 pandemic impacting production and availability of goods and services. The downturn in the global economy decreases the market for UK exports, which is all the same, while lower domestic demand reduces UK imports. The projected lower levels of domestic demand would most likely contribute to a reduction in intermediate inputs, including those imported. There can also be impacts on the timing and structure of exchange flows. The physical travel constraints that have been implemented and the closure of production in many countries are likely to lead to disturbances in global supply chains. Cross-border utilities are offered by means of procurement, all of which would be impacted to varying degrees by COVID-19.
● Investment income: Income can have an effect on foreign equity investments owned by the United Kingdom and international investors. This can represent a reduction in the income of the company or its cumulative retained earnings, which would be related to the success of the global economy. It can also represent the decision to make fewer dividend distributions in order to save money. It is also possible that debt investment profits will also be impacted, reflecting lower interest rates in many countries.
● Current and capital transfers: Present payments include humanitarian assistance and receipts for remittances expected to be impacted by the wider effects of COVID-19. For example, the voluntary and compulsory constraints in place have had an effect on many sectors in many countries. Migrants are prominent in some of these sectors, which may have an effect on the volume of remittance payments. This may reflect some decrease in labor demand in these sectors, or that migrant workers may return to their home countries in response to a pandemic. Any concerted foreign policy solution to debt forgiveness will be mirrored in capital flows.
REFERENCES:
(n.d.). European Central Bank. https://www.ecb.europa.eu/stats/balance_of_payments_and_external/balance_of_payments/shared/pdf/Impact_of_Covid-19_in_BoP.en.pdf
The impact of COVID-19 on China’s balance of payments and foreign reserves: An update. (2020, April 28). BBVA Research. https://www.bbvaresearch.com/en/publicaciones/the-impact-of-covid-19-on-chinas-balance-of-payments-and-foreign-reserves-an-update/
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