Coronavirus has already changed the way people operate their business. It also damaged the travel industry and increased consumerism, but in the digital world. This is to name a few changes. Now that is officially a pandemic for a couple of months, how can a pandemic change the economy further?
The supply-side impact is the first one, including investment. There is a shortage of jobs, people are insecure, many are being laid off, and since the pandemic surpassed the 6-month threshold, it will be hard for the economy to bounce back.
What is a supply-side effect?
In short, the supply-side effect means reduced manufacturing output because of the lockdown. Many are afraid, and even though it seems like things are slowly going back to normal, seeing cinemas are opening again, there are high chances there will be another lockdown since the virus hasn’t gone. Many teachers have been sent home the first week schools were open, and we are yet to see how the cinema opening will affect this further.
What about the Demand-side effect
Since travel restrictions are imposed, there will be a significant fall in demand for some sectors, especially travel and tourism. This has become devastating for local businesses, such as restaurants and gift shops, who rely on tourists.
On the other hand, domestic tourism is rising. People are trying to distract themselves, to feel better, to be more in nature. Rather than being closed off in cities, they choose to go to the countryside, whenever they can.
Work from home, becoming the new normal.
Thanks to the internet and freelancers, we have witnessed a shift in people working from home or wherever they have an internet connection. This can prove profitable during the pandemic since the change that many companies still refuse to impose will have to happen. Of course, there are still jobs where you cannot do that, but this can be a much more significant change than it seems.
Will monetary policy offset the fall?
Usually, if we get a demand-side shock, the monetary authorities cut interest rates (like they did) to boost demand. The government issued a fiscal policy to increase public sector investment, which helps to maintain aggregate demand. The real problem is that a pandemic is both a demand-side and supply-side shock. If people stay at home because they are sick or fear going to work, a demand-side policy cannot help it. A tax cut does not significantly help if you are not working, or it is difficult to get goods.
People are getting more depressed since they cannot communicate with their peers how they usually do. Contact is limited, and it’s taking its toll. People feel confined, which increases the depression rate, leading to low job efficiency, etc.
The outbreak of Covid-19 reminds us how integrated the global economy is and how vulnerable the economy is to people and international travel, which was the most normal thing in the world until recently. The virus will have a negative effect, which depends on the outbreak’s current severity, not to mention another wave. On the other hand, it could highlight the global economy (secular stagnation, weak demand, weak productivity). This may prove to be the main issue, which causes a prolonged recession – even when the outbreak eventually and hopefully disappears