The Economics Behind COVID-19
An adverse impact on the global economy, surpassing that of the 2003 SARS epidemic to a financially incomparable extent, the nCov-19 pandemic has aggravated it’s impact on economic agents. With falling commodity and stock prices, hike of unemployment claims and rising government sovereign default — the situations were potentially capable of resulting in declaration of national bankruptcy.
Supply chains could no longer be redirected to mitigate the situation of global falling demand for firms causing greater cons to producers of luxury and avoidable goods (elastic demand nature). This was due to the decreasing consumer spending as a result of falling employment levels and wage rate due to the low economic activity. The situation being similar for several other industries for instance: automobile, tourism and real estate, the economy experienced a reduction in aggregate demand.
Wall street has recently recorded a massive reduction in investments leading to the quickest market decline in history for the S&P 500 stock market index. This was as investors recalculated future corporate profits, which as per current market scenario’s was likely to fall to a negative extent causing them to reduce their investment’s to much lower figures impacting the availability of share capital and other investments to several companies. This was as firms wanted to maintain the value of their significant assets before a massive asset reduction. Whilst the much small scale firms preferred to be acquired in certain cases for insignificant values due to the floor value availability of financial capital, as result of the capital market crash. Analysing the trend in the stock market index’s globally, this by far was the largest stock market decline after the 2008–9 financial crisis. Due to the unique government legislation of the ‘lockdown’ as an initiative to control the virus, the corporate functioning has declined lowering the economic growth threatening an unprecedented recession!
As per my evaluation of current market performance, an informed conclusion would be that despite a cut in investments in a particular industry, the alternatives investments are likely to be viewed. With deflation in real estate prices, income holders of a higher bracket are likely to make an investment considering restoration of asset value, one economic activity gradually peaks. Thus, at an aggregate microeconomic view, the change in investments is unlikely to be impactful for the economy as a whole however, the situation is highly adverse for corporates.
At a macroeconomic level, economic situations are highly interdependent with regards to international relations and political rebates. A hypothetical yet suitable example nation to view the economic impacts from a macroeconomic perspective would be China. Accounting to 16% of the worlds GDP, the 2nd largest economy in the world and the world’s largest exporter with 1/3 manufacturing output in it’s secondary sector, this nation has by far been highly detrimental, to all the nation’s globally by declining it’s exports.
Damaging inter-production and lowering available good’s in nations with an approach of specialisation, the nation’s falling commercial relations have had impacts to the global economy in it’s entirety! With lower exports and high cyclical unemployment, economies have not made complete use of their available resources becoming a barrier to them producing at their full potential reducing the potential economic growth! This reduces the availability of goods and services resulting in a consumer market sales approach of rationing and lottery only if an nonexcludable good due to the demand-pull inflation (i.e. Hand Sanitisers). However, as the situation has halted globalisation with reducing imports as well as exports, the effect on foreign exchange rates have been far less impactful.
Government spending is another key economic driver amidst the virus. As implied by it’s name government spending on healthcare facilities and merit goods have increased by a great deal for social welfare. The other aspect of increasing government spending has been the reduction in tax rates for low income households as an initiative to reduce the economic burden. However, in order to control deficits due to taxation being the government’s major source of revenue and the current economic output being low, there has been a massive taxable income bracket. This adoption of the expansionary fiscal policy measure has led to gradual economic restoration. Monetary policy measures have been implemented however, interest rates have been the only driver where an increase or decrease has been at the discretion of central banks through a comparison of the average spenders and savers in the economy. However, with a view to keep inflation within bounds money supply has not been an alterable situation. On an average scale, deflation has been the price level trend amidst the pandemic.
Stimulus packages are significant response based economic models to explore, the response by the United States Federal Reserve has by far been the largest response stimulus for which it’s pros and cons have been highly debated amongst economists. The Fed has launched a 2 trillion dollar stimulus, inviting certain cons such as — voluntary job resignations. Despite being in an employment demanding situation to an individual, the high monetary payments have brought to response voluntary job resignations. The increase in disposable income has generated higher demand for goods which are classified has ‘demerit’ due to improper tactics of financial prioritisation within households. The pros of the situation are intact greater where the utilisation of the financial package has been utilised effectively. However, consumer utilisation of financial support is rather a massive assumption in the field of macroeconomics. Backed up with stronger government legislation, I believe consumer responsibility could gradually rise.
The development of economic models, using game theory has been the heart of study by economists amidst the virus, with optimism playing it’s major role better solution to tough financial conditions will be developed through healthier international relations. With several economist’s, scholars and executives, aspiring for more productive economic forums and discussions to follow, our world would soon seek it’s stability!
