April 20, 2020

In the first article of this series, we looked at where we currently are with the Coronavirus and when it would possibly end. Next, we’ll take a look at the impact on the economy.

There has been a lot of debate as to the trade-off that is currently being made: to save lives or to save the economy. Some think this is a false dilemma, that through different measures (in most cases not instituting a lockdown) we would not have to sacrifice the economy and would still save lives. Presently, most governments have chosen the lockdown route and this is already having an impact on economies around the world. The data in this post will include references to a few different countries in order to get a well-rounded view of where we could end up, but naturally different economies will behave differently. Due to the world being so inter-connected, we will all be affected in one way or the other.

Jobless Claims

One of the first pieces of data to come out are the number of jobless claims due to the pause of the economy. This is clearest in the US, and some alarming comparisons can be made to previous depressions in order to foresee what might be coming.

US jobless claims reached 6.6 million in the first week of April, far higher than the 3.3 million predicted by several economists and only adds to worries about the depth of the incoming recession. After the Great Depression, 25% of the workforce was unemployed. There are predictions that the unemployment rate could reach 32% in the US from the Coronavirus and that the economy could contract 30%.

This is a once in a hundred year event happening and the cost to the economy will be huge. In order to try and prop the economy up, countries around the world are printing money. The US has approved a $2 trillion (!) stimulus package comprising of direct payments to individuals, small business loans, unemployment insurance benefits and loads for distressed companies. Other countries are doing the same or similar, from lowering interest rates to deferring tax payments and outright grants.

Recession

The economic data currently points to a recession for many countries around the world. A recession occurs when there’s a significant decline in economic activity as consumers and businesses spend less money. Generally, there is a spike in unemployment, businesses cut down on the number of hours employees work and there is an increase in part time work being done. The number of bankruptcies and foreclosures increase.

Consumers are less willing to spend their money, resulting in less revenue for businesses. The stock market takes a knock, resulting in a loss in investment value. The housing market suffers as total home sales reduce, and the GDP drops. If the recession is lengthened and deep, it will turn in to a depression.

In short: it’s a general suppression on economic activity which will affect everyone in some way. It might affect you directly (you lose your job, go bankrupt) or in a secondary way (your business has a sustained loss in revenue, your salary is cut).

Down The Road

The economic measures listed above come at a cost which will have to paid at some point. Right now the focus is on not letting the economy collapse, and in ensuring that when the time comes to re-open the economy once more, there are business left to open their doors. Without these economic measures, most businesses would shut their doors for good. At least with these packages, many will be able to stay afloat in the coming months.

Unfortunately, there will be many who can’t. The loans or grants might not be sufficient, especially for companies operating on razor thin margins or those who have small reserves (most restaurants hold only 16 days worth of cash reserves). What happens to these business owners, their employees, their suppliers, their suppliers employees?

The current answer seems to point to more reliance on the state. With the state supporting those who need it, the economy can slowly start turning again and we can reach some level of normality in the months and years to come. As the economy recovers, the cost of the current economic rescue packages will start to be paid.

Will the current economic situation have a lasting impact on work? Due to the nature of our situation - work from home, social distancing, etc - coupled with the looming recession or depression, the answer is undoubtedly yes. I will explore some of what this might look like in the next post in this series.