Updated: May 28
Image Credit: https://www.fpri.org/article/2020/03/covid-19-crisis-political-and-economic-aftershocks/
While trying to stem the spread of the coronavirus to prevent more infections and deaths, the international community is also redoubling efforts to cope with the strong economic consequences that the pandemic is already causing.
The blow that the COVID-19 is causing to the world economy is general, however, it is harder for certain sectors - at the moment, those that are most affected are those related to tourism. In recent days, European and North American airlines have already asked their governments for urgent help to avoid bankruptcy.
The gastronomic sector - boosted in a significant proportion by tourism - is also suffering the consequences, after the authorities of various cities in the world ordered the closure of bars and restaurants.
Unlike other crises, the current one affects all the G7 countries (Germany, Canada, the United States, France, Italy, Japan and the United Kingdom) and China at the same time. Although the outbreak started in the Asian giant, in just a few days it spread throughout the world and, in fact, the epicenter has moved to Europe, especially Italy and Spain.
Against this background, three types of economic blows can already be identified.
Firstly, the impact of the virus directly affects production: more than 230,000 infected are isolated and in most parts of the world, the authorities either decreed a total quarantine or urged citizens to remain in their homes. This, consequently, impacts spending.
On the one hand, the reduced circulation on the streets inevitably causes less consumption; On the other hand, many workers stop charging if they cannot go to their jobs.
Secondly, the professor of international economics at the Graduate Institute of International and Development Studies in Geneva, Richard Baldwin, emphasizes the effects of the different containment measures implemented to stop the spread of the virus, such as the closure of factories and offices, travel bans, and quarantines, among other examples.
Baldwin explains, that the third point is related to the fact that the crisis caused by COVID-19 "has consumers and companies from all over the world crouched in a way of waiting and seeing." This is reflected, for example, in the massive drop in travel and hotel stays.
The Circular Flow
The specialist explains how this financial flow develops and how it is strongly affected by the advance of the coronavirus. “In a simplified way, households have capital and labor that they sell to companies. They use it to do things that households then buy with the money the companies gave them, thus completing the circuit and keeping the economy going” Baldwin explains.
The main problem in the current situation is that the economy continues to function when money continues to flow through the circuit - generally speaking, an interruption of the flow anywhere causes a slowdown everywhere.
Given the slowdown in the labor market, many people stop collecting their wages, which can cause financial problems for their families or even bankrupt them.
This generates a strong reduction in spending and, therefore, the flow of money from households to the government and businesses.
Baldwin assures that these negative effects on domestic demand affect imports and, consequently, the flow of money to foreigners. This does not directly affect domestic demand, but it reduces foreign income and, therefore, export spending.
The present crisis also strikes manufacturing, a sector especially vulnerable to these situations since many productions have been and will be slowed down for weeks or even months.
All this impact on the labor and financial sector can lead, in many cases, to the bankruptcy of companies. This creates new interruptions in the flow of money, since the creditors do not see their credits canceled and the workers are unemployed. Furthermore, the bankruptcy of one company may endanger others. Baldwin recalls that this type of chain bankruptcy has been seen, for example, in the construction industry during the housing crisis.
He notes that governments should ensure that people have money to continue spending, even if they are not working.
A secondary benefit of this would be to subsidize the type of quarantine necessary to flatten the epidemiological curve.
In fact, the United States government has already been in favor of sending cash to all taxpayers in the country in order to stimulate the economy and prevent a significant percentage of citizens from being able to meet their expenses during the paralysis.
Different countries and international organizations have announced respective stimulus packages. The International Monetary Fund (IMF) was willing to mobilize a trillion dollars, while those referring to European countries such as Spain, England and France are in the billions and in certain cases, such as that of France, they include forgiveness in rent and certain taxes.
The German government led by Angela Merkel, indicated that it will pay “whatever it takes” to alleviate the economic effects of the pandemic.
The World Health Organization (WHO) warned that, if the current scenario does not change dramatically shortly, 25 million jobs are at risk. The assertion was reflected in a report by the Bloomberg agency, which indicated that the United States Secretary of the Treasury, Steven Mnuchin, informed US senators that the unemployment rate in the country could reach 20 percent without packages of massive stimulus to counteract the economic impact of the disease.