Coronavirus and Economics
Source: By Lokesh Kumar: Mint
The world is talking about recession. Even analysts have started calling this recession “a novel-global recession" since it will be temporary and the contractionary period will be short-lived. But before reaching a conclusion, let’s understand the impact of coronavirus on global economy from economics perspective.
Coronavirus originated in China and spread to most of the world. It is spreading faster and surging in countries such as Italy, Iran, and South Korea. The World Health Organization has officially declared the COVID-19 coronavirus a global pandemic. The virus has infected around 170,000 people and killed over 6,500.
Coronavirus has now emerged as black-swan event. A random event that is completely unpredictable. It can cause catastrophic damage to an economy and market. The nations are so much integrated now that an event in one country could easily spill over to another.
Governments acted to curb the virus such as China locked down Hubei province, nations closed all schools, universities, malls and hotels in several regions, sports and cultural events are either cancelled or postponed, tourist visas suspended, travel to severely affected nations banned. All this results in supply disruption and reduction in consumption but it will save humans and worst possible damage to the world. In the model of supply and demand, the leftward shift in aggregate supply will increase prices and reduce output. The downward shift in aggregate demand will reduce prices and output. Both supply and demand will adversely affect output and thus lower economic growth.
The shutdown can ruin industries such as airlines, travel and tourism, sports, hotels, entertainment and many more. The contribution of these industries to some economies is very high. So, there could be a series of layoff and rise in unemployment rate.
Given the low interest rate environment post 2008 financial crisis, firms are already highly leveraged and corporate debt has piled up. The access to cheap credit helped many firms grow in the expansion period. A “sudden stop" to the economic activity now will cut revenue for many firms and make it difficult for them to repay the loans to their creditors. It can lead the firms to default. And defaults of firms would hit banks and that results into less and cautious lending. The business investment will fall.
The recent fall in stock market is similar to what we have observed in past recessions and it’s always the first thing that happens during recessions. The volatility in stock market has skyrocketed. Plunging interest rates and oil prices lower inflation expectations. However, if supply shock outweighs then it will create the situation of high inflation and unemployment.
US-China trade war hurt global trade over the past two years and now the coronavirus. Global supply chains and business operations get disrupted due to coronavirus outbreak. Several nations are imposing restrictions on exports of medical products to save them for domestic consumers. Multiple countries are closing their borders with neighboring countries. Monetary and fiscal policy cannot solve the virus problem but it can somewhat prevent the problems arising from this virus to the economy. The cut in interest rates will provide only modest relief. The investment will fall even the interest rate reduce further because of fear and low confidence in the market. The ease in monetary policy will have little impact on aggregate demand in this situation. The ease in fiscal policy in terms of tax-relief to hard hit businesses, health spending is crucial for the economy to sustain.
The 2020 recession is unavoidable unless the coronavirus stops spreading or some vaccination is developed to curb this virus. This recession will not be caused by economic or financial aspect but by human aspect and which cannot be treated by loose monetary and fiscal policy.
Analysts used to analyse every financial and economic aspect of each economy to know where the next recession would occur and what will cause the next recession. Now, the answers to their questions are clear -- the next recession will occur globally, not just one or two economies, and a virus will cause the next recession.
