The Link Between Coronavirus and Economic Recession: Is It Real, Imagined, or Exaggerated?

As the world reeled from the impact of the SARS-CoV-2 pandemic, it became impossible to avoid recognizing the profound connection between the virus and the economic recession that followed. The UK, Europe, and the US are experiencing the worst economic downturn in recent history, with industries shut down and millions out of work.

Understanding the Economy and Its Impact

The economy is not a mystery but a system of interconnected goods, services, and people. It is about the production, distribution, and exchange of goods and services. People buy products based on their jobs and financial capacity. When the pandemic-induced lockdowns swayed the global economy, it led to a massive job loss and a sharp decline in economic activity. Here are the key points to consider:

Manufacturing and Sales: The shutdown of factories, businesses, and services has significantly disrupted supply chains and the distribution of goods, leading to a decline in economic activity. This has cascaded into a cycle of unemployment, reduced consumer spending, and business closures.

Employment and Income: When people are unemployed, there is a decrease in income. This further exacerbates the economic downturn as businesses face reduced revenue, leading to layoffs, and affects other sectors that rely on consumer spending.

Government Finances: During the recession, governments find themselves in a challenging position. With reduced tax revenue due to decreased business and employment, they struggle to fund essential services such as healthcare, social programs, infrastructure, and education. This has led to more people becoming unemployed as governments have fewer resources.

The Recession: A Historical Perspective

The National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity lasting several months, evident in factors like GDP, income, employment, and industrial production. While the duration of the current recession is still uncertain, it is expected to follow four common shapes: V, U, W, and L. The 2020 recession is anticipated to follow a U-shape, with recovery taking years to regain pre-crisis employment levels.

Global Impact of Coronavirus on Trade and Economy

The pandemic has severely impacted global trade, with world merchandise trade set to plummet. Two scenarios are possible:

Worse Case Scenario: A second lockdown could lead to a 8% global GDP contraction, with slow recovery in 2021. This scenario is more likely if a second lockdown is implemented.

Better Case Scenario: Without a second lockdown, while growth may occur, employment may take years to recover to pre-crisis levels.

The OECD reports that world merchandise trade is set to drop by 13-32% in 2020. This downturn is anticipated to have far-reaching consequences for both developed and developing economies.

The Economics of Inequality and Debt

The persistent and growing economic inequality has created a saving glut, leading to low interest rates and increased household and government debt. However, with interest rates hitting their effective lower bound, further borrowing and consumption by the non-rich is impossible. This has made the global economy more dependent on credit and debt.

Marriner Eccles, in a congressional testimony in 1933, warned that the rich saving excessively would weaken the economy, driving policymakers into a ruinous choice between high unemployment and rising debt. The current global debt stands at over 300 trillion dollars, an increase from the early 1980s, primarily due to increased consumption and borrowing.

This saving glut pushed up the US current account deficit, financed by less well-off households and the government. While the 2008 recession did not alleviate this debt accumulation, government and household debt has continued to rise. This raises the question of sustainability and the need for radical alternatives to stabilize the global economy.

Global Inequality and Debt

Greta Thunberg recently highlighted the stark inequality in carbon emissions, with the richest 1% causing double the CO2 emissions of the poorest half of the world's population. A joint report by the Stockholm Environment Institute further emphasizes the historical and ongoing inequalities passed on to future generations. Even with moderately progressive socio-economic development scenarios, very little atmospheric space is left for the world's poorest households.

These inequalities not only affect the environment but also perpetuate a cycle of debt and poverty. The coronavirus has further exacerbated these issues, leading to calls for a transformation in economic policies.

In conclusion, the link between coronavirus and the ongoing economic recession is very real and complex. By addressing economic inequality, increasing government spending, and reforming global trade, we can work towards a more sustainable and equitable future.

References:

NBER - National Bureau of Economic Research OECD - Organisation for Economic Co-operation and Development Stockholm Environment Institute