The Economy’s Pandemic (Part - 1)

The Coronavirus Pandemic has brought in several changes in various sectors across the world - from healthcare and education to the processes of social behaviour; one such area is the Economy. The reason why this area is a focus of interest is due to its dynamic nature - most other sectors seem to have stabilised to a certain extent; however, a majority of the countries across the world are kicking into higher gear as they try to salvage their economies while preparing them to grow back to their original state in the years to come. This means that a variety of strategies shall be used, making this one of the most exciting periods to learn for economics enthusiasts.

By analysing from a macroeconomic perspective, we see several similarities in the top economies worldwide. However, to understand the general economic conditions of these world economies before, during and predictably after the pandemic, we must first understand their overall economic framework.

A. THE ECONOMIC PHASES OF COVID -19

Through American economist, Jason Furman's, explanation, the economy can be seen to go through three distinct phases during and after the pandemic, and it is important to understand these phases in order to see their connection to the economic strategies of countries.

Phase 1: The Collapse

This is the simplest of the three phases, referring to the period from early 2020 to its end or, in some cases, the first quarter of 2021. This phase is marked by a drop in overall activity by more than 15%, indicating the sudden damage to the economy due to the pandemic.

Phase 2: The Partial Bounce Back

The second phase of the economy can be called the ‘Partial Bounce Back’ due to the sudden upward spike in the economy. Mathematically, it may be one of the fastest economic growths in several years. This is the immediate response to the fall in the economy - businesses shift to back-up plans, education goes online and economy tries to get back up. For instance, around 2 million jobs were lost in the pandemic; however, close to 3 million jobs will be created as industries adapt to the situation. This can be called as one of the easier economic growths as it doesn’t take much effort to bring the economy partially back up.

Phase 3: The Slog

The third phase is the most difficult. The Partial Bounce Back would eventually stall, the economy still wouldn’t be back to its normal rate of growth. ‘The Slog’ is involved in creating ways through which the economy can return back to original. There are two reasons why this phase is the most difficult. Firstly, citizens need to find new jobs since their old ones wouldn’t exist. This is slightly different from the situation in the second phase where old jobs were being brought back after a while as the market started to grow again. However, the pandemic may cause several jobs to go extinct as new methods, strategies and non-human mechanisms (such as AI, algorithms and capitalistic machinery) take their place, forcing people to search for a new job. The second reason is that the pandemic will create new industries and demand structures which will require new skill sets. The working class will have to be adaptive and flexible in order to fit into the new industry.

Hence, it’s clear that the economies of several countries are, and will be, going through drastic changes. The three phases are depicted by their respective boxes at the top of the graph. The graph itself depicts three distinct approaches to the recovery of world economies. The target for countries is to reach their original growth (dotted green line). The Optimistic Approach (green line) shows the fastest recovery where the Partial Bounce Back takes most of the burden while a negligibly small part is taken up by the Slog. Accordingly, the economy reaches the target by mid-2021. The Pessimistic Approach (red line) shows an opposing recovery style where the Slog takes the majority of the strain and the economy doesn’t reach its target even by 2026. The Realistic Approach (black line) shows a fast recovery where the economy comes close to target by 2026.

At the moment, it seems likely that most countries shall either have a Realistic or Pessimistic Approach; however, a few top economies like USA, China or even Japan show potential of achieving the Optimistic Approach.

B. Determinants of Macroeconomic Trajectory

There are several factors that would influence the speed and direction of the macroeconomic trajectories of economies. The ‘most important’ determinants are being focused on the most by world governments.

Since a large focus, resources and strategies target the ‘most important’ section, the relatively lesser focused ‘largely important’ section shall provide the comparative advantage for some countries over others.

The problems, relating to the latter section, are faced by businesses and industries that governments need to tackle in order to achieve this advantage. Of these, some are Fast Recovery (FR) problems that take lesser time to solve, assuming that correct policies are used. Others are Slow Recovery (SR) problems, which take longer to solve and don’t have specifically targeted policy solutions. Some of these problems are:

1. Demand Shock (FR)

It involves less spending by the society, which tries to save money for any emergencies the pandemic might bring forth. Such a problem can be fixed by changing the fiscal and monetary policy to encourage spending and increase the money supply in the economy. Government spending can also be increased.

2. Supply Shock (SR)

It involves less production due to downsizing as well as shutdown of factories and supply chains. It is a harder problem to solve and is mostly a problem relating to the ‘most important’ section.

3. Liquidity Shock (FR)

It involves a lack of money to pay for the salaries of the employees. It is partially linked to the Demand Shock problem. Better handling of current assets in the form of better cash flow management or getting quick payment from debtors can help in reducing the problem It can also be solved through lending programs for the company.

4. Solvency Shock (SR)

It involves a lack of money to pay for the company debts. Such a problem cannot be solved simply by taking in more loans and increasing debt. Companies may even need to file for bankruptcy in some situations, for instance the popular car rental company, Hertz.

From the above problems, it’s clear that FR problems are comparatively easier and faster to solve than SR problems. Hence, more FR problems, and quick solutions to them, lead to a large Partial Bounce Back. On the other hand, more SR problems lead to a smaller Partial Bounce Back.

Now that the overall economic framework of world economies has been made clearer, it becomes easier for us to understand the policy responses as well as the next steps that should be taken to save the bludgeoned economy.

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