The New Great Depression: Consequences of Coronavirus for Ukraine and the World

24 April 2020 16:40

Workers eat sitting 1.5 meters away from each other at the Dongfeng Honda auto plant, in Wuhan, Wubei province, China. March 23, 2020.Photo: EPA-EFE/YI XIN

It never rains but it pours: the coronavirus pandemic has brought a host of unprecedented problems to the modern global economy, the consequences of which will be felt for the next several years. A new economic crisis, its start announced by the International Monetary Fund, may be the biggest and strongest of its kind since the Great Depression nearly a century ago in the 1930s. And it’s impossible to tell at this point how long it may last, seeing as the pandemic continues to wreak havoc around the world. What will this corona-crisis bring for the world, and for Ukraine?

The Economic Disease

Oftentimes, taking someone’s bodily temperature is enough to tell if they’re sick: if it’s high, then that’s a sign that the body is fighting off some sort of infection. It’s no wonder that taking someone’s temperature is seen as a key preventative measure in the fight against the coronavirus, and used on national borders and airports.

But for the economy, no direct analogies exist – the closest would be tracking changes in a country’s GDP (gross domestic product). A fall in a country’s forecasted GDP could be a sign of further trouble ahead, though like taking someone’s temperature, it may only highlight the presence of a problem – not its cause.

GDP growth is often touted as a way to measure a national economy’s progress – as a country’s GDP, in theory, encompasses all of its production. Though it does bring with it some problems – GDP only counts production, not welfare, nor does it account for distribution – meaning that a year in which some make billions of dollars while the majority of the population experiences a downgrade in real income may be counted in GDP growth even if the mass of the population grows poorer. And, for Ukraine, GDP relies only on official statistics – discounting Ukraine’s influential grey and black market sectors.

But as a shorthand, GDP can sometimes serve as a semi-reliable way to “take an economy’s temperature”, as production shortfalls signal that people are buying less, spending less money, and a general slowing of trade and the economy as a whole.

So, to take the economy’s “temperature” at the moment, it’s clear that something, somewhere, is going wrong. And a proximate diagnosis can immediately be placed – because of the coronavirus quarantine, lockdowns, and unemployment waves spreading across much of the world, people are quite simply running out of money.

China, often considered one of the world’s economic “growth engines”, a major importer, exporter, a key player in modern globalized logistics chains, and the world’s second-largest economy, is posting very chilling news – with massive declines in automobile purchases, year-over-year: February saw 79% lower sales than in 2019, and March saw a drop of 43.3%. Add in worrying factors like a 38% drop in industrial profits in January and March, and the country’s first-ever quarterly GDP drop of 6.8% (whereas previously it had grown consistently by over 5% every quarter), and a very concerning picture begins to take shape.

Line workers at the Dongfeng Honda auto planet in Wuhan, Wubei province, China. Wuhan, the epicenter of the pandemic, started to open up in early April after two months of strict quarantine. Photo: EPA-EFE/ROMAN PILIPEY

Global trade is also taking a hit, with an estimated drop of anywhere between 13-32% in 2020. But the biggest effects will be felt by working people, as unemployment rates surge to levels unseen in decades. The United States, the world’s largest economy, has already reported 22,000,000 newly unemployed in March, and as quarantines continue and businesses continue to report lower sales or shutter their doors entirely, that number is sure to rise.

And the U.S. isn’t the only place hard hit by unemployment. Oxfam, a confederation of anti-poverty charities and NGOs, estimated that this new crisis could result in 500,000,000 people falling below the global poverty line – which would wipe out the past 20 years of gains in combating poverty.

In Ukraine, 400,000 people have officially declared unemployment since the start of the lockdown, but that only represents official statistics. Prime Minister Denys Shmyhal, quoted by RBK-Ukraine, said that the government estimates closer to 2,000,000 newly unemployed Ukrainians. The IMF believes that Ukraine’s GDP could fall by 7.7%, leading to unemployment rates in the country similar to those in the early and mid-2000s.

People stand in line in order to receive food parcels, during weekly distributions in the city of Santa Ana, California, U.S.A. April 17, 2020.13.5% of the U.S. population have lost their jobs as a result of the coronavirus quarantine. Photo: EPA-EFE/EUGENE GARCIA

What does the IMF say about the crisis?

The International Monetary Fund has marked the seriousness of the upcoming economic crisis in a recent forecast. It estimates that global GDP will fall by 3% in 2020 – the biggest such fall in several decades.

A 3% fall, roughly speaking, would result in about $2.7 trillion less of goods and services produced during the year.

And that can be considered a conservative estimate – it relies on the COVID-19 pandemic more or less resolving in the first half of the year, meaning that the forecast believes that businesses and factories will be reopened and working normally by July. But if a second wave of the pandemic hits, and the quarantine is extended beyond the start of summer, then the global economy could be facing an even worse crisis.

“It’s the first time in the history of the IMF that epidemiologists are as important as macroeconomists for our projections,” said IMF director Kristalina Georgieva, during an interview on CNBC.

Dmytro Boyarchuk, director of CASE Ukraine, an NGO specializing in economic research, told hromadske that it’s too early to tell if the IMF predictions will be accurate. “At the moment, this IMF projection is only a suggestion, as we lack the necessary data to use as a foundation and rely on for a projection. I’m inclined to say that the new economic crisis will be protracted.”

One of the particulars of the new crisis is not only that it creates unprecedented uncertainty, but also that it strikes employment the hardest, by changing the logistics chains of production and distribution. It destroys whole sectors of the economy, such as tourism – 75,000,000 tourism workers globally are expected to lose their jobs – transport, and even energy, due to the fall in demand for oil.

Workers at a factory for the production of metal doors in Valencia, Spain. April 14, 2020. On April 13, Spain allowed 300,000 people to return to work in the spheres of construction and manufacturing. Photo: EPA-EFE/BIEL ALINO

Negative Prices for Oil

One of the biggest immediate effects of the corona-crisis, beyond unemployment, has been the fall in oil demand. In fact, demand for oil has fallen so sharply that prices for West Texas Intermediate – a type of crude oil often used as a benchmark – have gone negative for the first time in its history.

On April 21, WTI futures could be "bought" for –$40 a barrel. (Futures aren’t the price to buy a barrel of oil right now, but to take delivery at some future point – in this case in May.) This has led holders of oil futures, who usually buy and sell these securities before any physical transaction takes place, to be in the position of having to take delivery and store their purchased oil – a feat that many traders were simply not prepared for. That has led to negative oil prices – traders are willing to pay money for people to take the oil off their hands, due to their inability to receive and store the physical product.

The fall in oil prices wasn’t only down to the coronavirus, but to the simple fact that there is currently far too much oil being produced. Price wars between Russia and Saudi Arabia, in particular, have contributed to the fall.

This, combined with a fall in demand in air travel – meaning fewer planes flying and less oil needed to fly them – falls in gas prices, as people no longer commute to work, and falls in manufacturing demands due to shuttered factories, have created the perfect environment for the current surfeit of oil.

A good percentage of oil is currently heading – not for gas refineries, or factories, or heating – but to storage, where it’ll sit until prices recover, and its sale will once again be profitable. But these storage facilities are quickly filling up.

OPEC, the Organization of Petroleum Exporting Countries, has agreed on record cuts in production – 10% – starting in May 2020. But the International Energy Agency, an intergovernmental body, estimates that demand will shrink by 30% this year – so even OPEC’s 10% cuts may not lead to prices rising or stabilizing any time soon.

Oil storage reservoirs at a BP plant in the town of Whiting, Indiana, near Chicago, U.S.A. August 29, 2019. The Whiting plant can process 400,000 barrels of oil a day, making it the sixth-largest refinery in the U.S. Photo: EPA-EFE/TANNEN MAURY

No good news for Ukraine

Ukraine could be feeling the effects of the new Great Depression with greater intensity than many other countries in the world. The Ukrainian economy is comparatively small and open, meaning that it's very reliant on the global situation – in particular, on demand for Ukrainian exports, namely metallurgical products and agriculture, as well as on prices for imports, such as energy resources and manufactured products like cars, electronics, and so on.

With the forecasted 7.7% drop in the Ukrainian economy, compared to the 3% drop worldwide, it’ll take longer for Ukraine to regain its footing: GDP growth in 2021 is estimated to be about 3.6%, while global growth is expected to recover at 5.8%.

This means that the gap between Ukraine and the world’s developed countries will only grow, in both competitive advantages and quality of life.

With Ukraine’s unemployment levels set to recall the early 2000s, Ukrainian workers face a future of uncertainty in the near term, and they’ll be struggling to regain their position even after the crisis passes.

“At the moment, Ukraine doesn’t feel the same crisis that’s raging in the West: market drops, massive unemployment. For Ukraine, the biggest hits of the crisis are still ahead,” believes Boyarchuk.

According to him, the real crisis for the country will start when Ukraine feels the drop in global demand for its exports.

A view of the Azovstal plant in Mariupol, Donetsk region, Ukraine. July 5, 2019. The Ukrainian economy is extremely reliant on demand for Ukrainian exports – namely, metallurgy. Photo: EPA-EFE/SERGEY VAGANOV

This is closely tied to a fall in Chinese demand – China is currently Ukraine’s largest trading partner. With weaker manufacturing and construction demand in China, Ukrainian metallurgy will be far less needed than previously – while fewer imports from China to Ukraine will lead to a fall in customs and tax revenue for the national budget.

But Ukraine’s agricultural sector may be a way to lessen the blow, at least a little.

“During any crisis, the agri-sector struggles the least. During an economic crisis, people are inclined to save on every product – but they’ll always be buying food,” says Kyiv School of Economics professor Oleh Nivyevskiy.

He believes that the agricultural sector may significantly expand in 2020, in regards to its share of the Ukrainian economy – though mostly due to the falling share of services and manufacturing as a percentage of GDP. Meanwhile, agricultural exports may reach 50% of all Ukrainian exports this year – currently its share is around 40%.

The agricultural sector is also less susceptible to quarantine: its work doesn’t require a large number of people crammed into a small space, and people can work outside in fresh air. So it is possible that some of the lost jobs in Ukraine could be made up in agriculture – depending on whether or Ukrainian agriculture will take the opportunity to expand.

What does the future hold?

Unfortunately, there are a lot more questions than answers in the new Great Depression. Not a single economist is willing to say anything with certainty – not the length of the crisis, or its impact.

The IMF supposes that the new crisis may lead to radically different consumer habits. For example, working from home and a long quarantine may lead to many office jobs becoming fully remote. This would reduce demand for paper, office supplies, and office rents. Real estate may change as a result as well – commercial rents may decline, while living rents may increase as landlords attempt to make up lost profits.

Digital marketer Mohammed Nader works remotely from home in Sharjah, U.A.E. March 24, 2020. Many companies around the world have implemented remote working politics due to coronavirus-induced quarantines. Photo: EPA-EFE/MAHMOUD KHALED

Consumer spending habits, such as on entertainment, may also see changes – people could continue to avoid public events even after the quarantine (which would hurt the event industry), and spend less time and money in cafes and restaurants. More remote work could lead to fewer users of public transport, and to spending more time outside, leading to a fall in hotel profits while benefiting eco-tourism.

“It’s very hard to say how the coronavirus will affect the economy’s structure. Probably, demand for digital services will rise, and it will stay the same for groceries. Other changes are very hard to forecast, seeing as we could see something very unusual as a result,” thinks Boyarchuk.

Time and data is needed in order to better predict the effects of the corona-crisis. And a predictable and stable situation with the coronavirus itself is also extremely important. It’s likely that later projections from economists and the IMF will be more accurate than the ones made now, and will provide more clarity in the currently uncertain economic environment. And then it’ll be possible to accurately judge the consequences of the unprecedented global economic crisis.

For all the latest updates on the coronavirus in Ukraine, follow this link.