Implications Of COVID-19 On The Economy – The Physics Of It

Enough has been written & spoken on the brutal attack of COVID-19 and the impact it is having on the Economy. I will try to give it another dimension using my grade-X, laws of Physics and the concept of Entropy with some thoughts on “so what” and what’s next for us as economies- India and Global.

Newton’s First Law of Motion

Every object continues in its state of rest or uniform motion, unless acted upon by an external force. Substitute “object” here with “Economy” and the external force currently is the Covid-19 virus. The external force i.e., Covid-19 has completely derailed the economy and its trajectory.

Every economy is a combination of complex interconnected actions—Debt/Credit—Investments & Consumption— Jobs—more per capita income–more Consumption—GDP Growth–more investment leading to a cycle of virtuous growth, i.e, “Uniform Motion” until the shock (external force) turns the tide along a different spiral. The same factors which were a boon become a bane because of an adverse external force.  Debt & Credit that was a money multiplier becomes the Achilles heel in a downturn. Consumption contracts – fear sets in—prices fall, jobs and salaries fall—debt & credit is taboo—liquidity exists but there are no borrowers and so on…   

This economic phenomenon demonstrating “newton’s first law of motion” has been played out time and again-every 2-5 years, though the size, duration and impact has been varied. 

1918 – Spanish Flu; 1997 – Asian Financial Crisis; 2001 – Dot com bubble;  2002-03 – SARS; 2008 – Global Financial Crisis; 2009-10 – Swine Flu; 2015-16 – Ebola and now 2019-20 – Novel Coronavirus.

Each of the events was like an external force which shook up the economy and pressed the re-set button and often caught us unaware.

The current external force Covid-19 has caused and will continue to cause havoc on “Demand Side” (China auto sales down by 90%, and with forced quarantine of all citizens in every country it is virtually bringing demand to a screeching halt). Social distancing leads to a forced collapse of economic activity, travel, tourism, hotels, retail sales, transport stoppages completely derail any economy. And if demand comes to a halt the supply side (as Manufacturing plants shut down both from a safety perspective and as inventories start piling up at various stages in the supply chain) also comes to a halt. Causing the vicious cycle explained above. And this will happen. An impending global recession is extremely likely to be cushioned a bit by significant government stimulus and will distinguish the men from the boys (low debt, cash-rich companies will survive the onslaught better).

First Law of Thermodynamics

Energy can neither be created or destroyed and only transformed or transferred from one form to another… is another of the basic laws of Physics & the universe. 

The reason I bring it up here is that while there is chaos in the economy on the one side, eg, less global travel, less consumption – it has led to prices of oil that have fallen to under $30/barrel creating a huge surplus and economic benefit for an oil-importing country like ours (even after discounting for the depreciating Rupee – A $1 drop in oil prices is almost Rs 10000 Cr saving for India). Similarly as prices of commodities fall as a net importer countries like India benefit significantly, and as rate cuts happen across the world it will imply lower cost of capital and higher ROIC’s for companies. 

The Law of Entropy – Disorder always increases

In Hindu mythology, we have the cycle of Brahma-Vishnu and Shiva i.e, the creator–preserver—destroyer. Hence, order will lead to disorder and events will happen that will reset the system. Laws of entropy have always played out and ruled out the eternal growth of any system or organization. It’s just that as humans for various reasons we refuse to recognize it as we often miss the wood for the trees or the forest while seeing the woods.

Contagion the movie made in 2011, is a kind of Deja’vu to what we are witnessing today in 2020. A simple felling of a tree in some remote place could cause a virus attack that could shake the world. 

Learnings & what could happen – The new normal after 3-4 Qtrs

  • Supply Chains will be reset—Global Supply Chains will become local, Shift from China-centric supply chains to newer economies. India should capitalise and benefit.
  • Social distancing will be the new norm- virtual offices, virtual teams, WFH will be business as usual-Infrastructure (Telecom, IT, Automation, Offices, Restaurants) industry will see a re-set.
  • Channels of shopping will see a change with e-commerce/e-tail playing a predominant role.
  • Eating habits will change – Healthy packaged food, ready to eat food will continue to surge as tastes & preferences develop due to a forced lockdown.
  • Healthcare and Hygiene industry will see a re-birth with increased awareness levels.
  • Responsible Growth will become an even more serious agenda on the fast track—water, environment, plastics and the 5 elements of nature will be a serious boardroom and across the organization agenda.
  • Business Continuity Plans and risk assessment will be more serious business in organizations.

This too shall pass- “Safety first”

Yes, the impact is and will be huge for humankind and this is yet another epic event. However, after night comes day and this too shall pass like every other event in the past.  The economic damage will be big in the lockdown phase. However, it is required – a necessary evil. And it could take 2-3 Qtrs or more before immunity and a drug is ready to combat the virus globally. There will be a recovery as we are an ingenious species. Whether U-shaped or V-shaped or L-shaped is hard to tell. The government, world bank and WHO are taking their steps. Economic bailout packages are announced or are in the anvil and bodes good tidings for a realistic optimist like me.

The thoughts & opinions are my own based on reading and hearing various media.