What will be the macroeconomic impact of Covid-19?
The charts below say it all. It's quite impossible to encapsulate the overall economic impact of Covid-19, but the ongoing global recession - yes, it has started - is expected to dwarf any other seen in recent memory. It would be crucial to understand how this differs from the previous big recessions, and what could be the policy interventions to alleviate the pain. Even more crucial, though, is to understand the trade-off - if there is one - between flattening the curve and reopening the economy.
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Points to consider:
- Is the cure - extreme social distancing - truly worse than the ailment (Covid-19) in terms of the economic damage it could inflict?
- What is the magnitude of economic ruin - as measured by unemployment, reduced output, inequality, among other metrics - that the coronavirus will leave behind?
- Covid-19, unlike the 1918 Flu, will probably not kill enough working age people to create a labour shock, so through which other channels could it impact the economy?
- Are socioeconomically weaker groups more vulnerable to the coronavirus?
- Will an economic downturn trigger debt default leading to financial illiquidity?
- Will investors take refuge in in government bonds, especially US treasuries, as they did during the 2008 recession?
- Broad economic effects of coronavirus
- NYT - One Simple Idea That Explains Why the Economy Is in Great Danger
- HBR - Understanding the Economic Shock of Coronavirus
- Vox EU - Coronavirus and macroeconomic policy
- McKinsey - Covid-19: Implications for business
- NYT - As Coronavirus Deepens Inequality, Inequality Worsens Its Spread
- Foreign Policy - The Coronavirus Is the Biggest Emerging Markets Crisis Ever
- Financial risks
- NYT - This Is How the Coronavirus Will Destroy the Economy
- Project Syndicate - The Covid-19 Debt Deluge
- Economic impact of social distancing
- Impact of previous pandemics
What will the post-pandemic economic landscape look like?
Some of the predictions are truly wild, and encapsulated by the tweet below. The extent of changes might depend on the duration and intensity of the pandemic - the longer it lasts and the more it kills, the greater the changes once it passes. A counterargument is that the 1918 Flu didn't end physical interaction, but this needs to be evaluated in light of the completely different socioeconomic and political structures of 2020. Regardless, even if Covid-19 were to suddenly stop dead in its tracks today, it would lead to a different world: digitization of services is likely to accelerate, workforce might be shed through automation, travel - business and leisure - will be reduced, and mass gatherings will remain depressed in the foreseeable future.
Points to consider:
- Which economic activities - grocery shopping, travel, concerts etc. - will move online, and to what extent?
- Will traditional centres of public revelry - malls, cinema halls, convention centres - cease to exist or be greatly reduced in importance?
- Will the contributions made by local retailers at this crucial hour, as opposed to endless delays by e-retailers, stem the tide of online shopping?
- Will the drive towards automation accelerate, and will it lead to job losses?
- How will companies change their policies - granting paid sick leaves, allowing WFH, hiring contract workers - to adapt to the possibility of another pandemic?
- What made the global economy in 1918 different from what it is now, and how would that change the impacts of Covid-19 compared to the 1918 Flu?
What will be the fiscal response of governments around the world?
The unprecedented economic shock of coronavirus has been met with an equally unprecedented fiscal response by governments around the world. The chart below ranks countries on their fiscal package as a share of GDP, although it's all but certain that more will come from most governments. Even fiscally conservative governments, including the US federal government, has instituted what can be called a temporary Universal Basic Income (UBI). All these efforts might be unavoidable given the conditions, but there are no free lunches: someone will have to pay for all the debt being accumulated by governments now.
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- What is the appropriate level and manner of fiscal response to the coronavirus-enforced recession?
- What will be the effect on government debt of advanced and emerging markets?
- Will UBI finally become a reality?
- Need for fiscal response
- The Hill - Coronavirus response must include bold fiscal policy
- NYT - A Payroll Tax Cut Won’t Work. Send Big Checks Now.
- Relief package is peanuts. India needs to triple it
- Debt problems for countries
- Financial Times - Fitch downgrades UK debt citing coronavirus impact
- NYT - The US Is About to Vastly Increase Its Debt. That’s a Good Thing
- Brookings - How does the coronavirus pandemic compare to the Great Recession
- Bloomberg - Coronavirus Sorts Bond Market Into Winners and Losers
- Axios - Debt crisis awaits in emerging markets
- WaPo - What the $2 trillion coronavirus bailout is really going to cost
- UBI
How will monetary policy react?
Monetary policy was the star of the 2008 crash. It made “quantitative easing”, “negative interest rates” and, to a lesser extent, “helicopter money” household terms. To soften the present blow, Central Banks around the world have cut rates and started injecting money into their economies, just as they did after the 2008 crash. It remains an open question how effective monetary policy will be in the present context, given the nature of the crisis and the fact that monetary policy was already quite loose prior to the outbreak.
- How effective is monetary policy in this context?
- Will the Fed go into negative interest rate territory?
- Will “helicopter money” become a reality?
- Will interest rates continue to be low in the foreseeable future, thereby triggering yet another debt accumulation cycle?
- Project Syndicate - The False Crisis Comparison
- Financial Times - Central banks must evolve to help governments fight coronavirus
- Vox - Monetary policy cannot solve the coronavirus crisis - but it can prevent secondary effects
- Reason - Congress and the White House Are Inching Closer to a 'Helicopter Money' Response
What will be the impact on inflation?
The traditional macroeconomic theory might predict that the fiscal and monetary stimulus, coupled with a shortfall in supply, might stoke inflation during the times of coronavirus. But the experience of past the decade shows that, at least in the West, traditional theory doesn't work anymore - an extremely loose monetary policy failed to stoke inflation. It would also be unfair to extrapolate from the impacts of previous pandemics given the drastic change in economic structures. Given the uncertainty, this would be an important variable to keep track of.
Points to consider:
- Will the shortfall in supply be neutralized by a drop in demand?
- Could Covid-19 trigger stagflation?
How will Covid-19 impact the Oil Industry?
The chart below says it all. A combination of pre-outbreak supply increase by Saudi and a post-outbreak collapse in demand has delivered a death blow to the oil industry. Oil futures predict a low price in the coming months.
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Points to consider:
- How, if ever, will the oil industry revive?
- Will OPEC and Russia come to a deal to drastically cut production to increase price?
- Reuters - Fancy Oil Price Calculator
- Global oil demand to decline in 2020 as coronavirus weighs heavily on markets
- Reuters - Russia calls for new enlarged OPEC deal to tackle oil demand collapse
- Implications of the coronavirus crisis on the global energy sector and the environment
- Oil Ground Zero: Running Out of Storage