An economy enters recession after two consecutive quarters (six months in a financial year) of negative GDP growth. However, the data for the first quarter will be out at the end of April and the second quarter in early July. In the absence of data, usually, one of the first places that signal a recession is the job market. How is coronavirus causing a recession? In recent weeks, oil prices plummeted to new depths. Moreover, global service industries such as hotels, airlines, the retail and commercial sector had to lay-off employees. As the businesses have stopped, and revenues are almost zero.
The COVID-19 pandemic has planted an unprecedented case in the history of global economics. The pandemic has left us with no resort but a panacea where – ‘to save the economy, the country needs to lock itself down first!’ A significant point is the majority of a country’s economy depends on consumer spending. For instance, consumer spending amounts to almost 2/3rd of the entire US economy. Moreover, we are not only shutting down factories, but we are also asking the ‘consumers’ to stay at home. In the state of a lockdown, a consumer is not spending on real estate property, consumer goods, and automobiles. But is spending the most on ‘what is essential’. However, only if the essential products and commodities are available.
Forecasting?
In any case, forecasting the length and impacts of a recession is extremely difficult. However, when lockdown ends, the course of the economy will depend on how soon the unemployed find jobs. Also, whether the financial aid and relief that governments provide will be enough for a speedy recovery. The bigger question is how quickly the consumers go back to spending and continue their ‘normal’ activities after the virus is contained.
So this is how coronavirus is causing a recession.
What is causing the cities’ economies to flicker?
Countries are trying to ‘flatten the curve’ by locking down and enforcing social distancing, but everything has consequences. The irony of the situation is such that- The more aggressively we mitigate the spread of the virus to save lives, the deeper the recession will be.
All economies work on the principle of ‘supply’ and ‘demand’ of goods and services. Preventive measures have emerged shocked, thereby disrupting both aspects of the principle. First, with factories and businesses shut, staff are working from home. A more critical area is borders around town, cities, and neighborhood levels are sealed, thus creating a supply shock. This, in turn, has triggered a demand shock, as industries stopped producing goods, they wouldn’t need raw materials. And businesses don’t need additional staff. As borders are sealed, so even if people could procure goods, it is a challenge to receive or distribute them. And there goes a full stop to economic transactions => NO TAXES ARE COLLECTED!. No tax collection also adds to the slowdown.
A lockdown has severe implications on the economy. One of the first countries to enforce a lockdown was China, where the virus originated in late 2019. In today’s global economy, China serves the world as a manufacturing base and, over time, has emerged as – ‘the factory to the world‘. Locking down the manufacturing base of the world has created a serious shock to the global economy. Manufacturing for the world requires procurement of several raw materials and services from the world over, and to reap economic benefits, it is important to ship the finished products too. However, international borders and ports shut with the lockdown, create a shockwave paralyzing global trade of goods and services. Thus, creating a GLOBAL RECESSION.
What is happening in India?
Cases in India are surging. India emerged out of a month-long lockdown on 3rd May and later intermittently locked down several severely hit states. However, locking down 130 billion people for over a month, where over 120 million are migrant workers who earn daily wages, means severe impacts on the country’s economy. Several of the migrant workers have lost their jobs. Such a surge in unemployment rates is alarming indicators of a recession. In the past few weeks, several unemployed migrants and daily wage workers were spotted walking to their hometowns, located hundreds of kilometers away from their former workplace. Such mass migration may accelerate the spread of the disease and is a potential threat to the lives of several.
Understanding the gravity is key
So we saw how is coronavirus causing a recession? But what do we need to bind ourselves with? The COVID-19 pandemic has shown us how humanity functions as a collective ecology. We need to realize how connected we are. But as the human costs of the pandemic continue to mount, stakeholder actions are critical than ever. Policymakers and economists say that governments should focus on providing relief to workers. Also, plan financial aid to companies so that the economy can bounce back.
We need to understand, we really cannot compare the current situation with other recessions in history. The worst of all acts would be to compare efforts. Comparing which country did better and who provided the most massive relief package is not going to solve problems. We need to respect all forms of occupation as the present situation is hitting all of humanity. In this fast mutating situation, being humble is a key asset.
The whole point that remains – we must survive this together and come out healthy on the other side!
An earlier version of this article was published on my LinkedIn.