How is the Coronavirus affecting the global economy?

The spread of the coronavirus (COVID-19) is a major adverse shock to both the supply side and the demand side of the economy. The supply side and demand side shock will cause a downward shift of the supply and demand curve, implying that employment levels will decrease significantly.

Several economists have argued that much of the negative economic effects and job losses that we are seeing is due to the supply side chock. A supply side shock means that the aggregate level of produced goods and services in the economy falls drastically as a consequence of higher production costs or in this case, an inability for workers to produce goods as sick people are staying at home. Governments can’t fix a supply side shock by stimulating the economy with expansionary fiscal and monetary policies. Only parts of the crisis are caused by a weaker demand and can be solved with conventional means to avoid a recession. What governments can do to mitigate the effects of the supply side shock is to help people and families in economic hardship with additional unemployment benefits and cutting costs for households.

The Swedish government has so far opened up for banks to allow customers affected by the corona crisis not to pay amortization on their loans for the time being. Many Swedish banks are now offering their customers amortization free periods. This will not help mitigating the supply side shock, but it will hopefully help people experiencing financial difficulties and limit the negative effects on the demand side of the economy.

The expansionary packages that governments are now offering to help businesses with their costs during the crisis, as their revenues go down, will hopefully also have some effect by helping businesses pay their costs so they can survive the crisis. Many are comparing this crisis we are experiencing now with the financial crisis in 2008-09. It is important to understand, however, that the financial crisis in 2008-09 caused foremost a demand side shock due to a drop in consumer spending as asset prices rapidly fell which was resolved with stimulating the economy by lowering taxes and cutting interest rates.

This crisis is more complex since governments are unable to shift supply upwards as people are staying home for safety and health reasons. Ultimately the supply side of the economy will suffer as factories are forced to close down and global supply chains are disrupted. Long-term unemployment will rise as the labor market is set to weaken.

Against this backdrop Swedish exports are expected to be lower in 2020. The Swedish minister of finance, Magdalena Andersson, has encouraged people to continue supporting local businesses and the Swedish domestic economy by ordering more take out food and shopping online. However, these recommendations will have little effect on the manufacturing sector and Swedish industries that account for a significant part of the Swedish GDP. Private citizens and businesses therefore need to prepare for a global downturn causing a sharp fall in productivity and total output. This crisis will demand coordinated bilateral efforts to stop the spread of the coronavirus and innovative policy actions from the worlds leading economies.

 

For more information please visit:

Oxford Economics – Coronavirus updates

World Economic Forum – Coronavirus deaths in Italy overtake China as economic damage mounts

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