Corona and the Economy
The upcoming recession is inevitable. There will be no identified solution to the issue as increased social distancing would lead to shrinkage in activity levels – consumption – in return reduced GDP. The virus outbreak has disrupted manufacturing supply chains and sharply curtailed energy and commodity demand. What was previously a manufacturing-only recession has now spread to the services sector? PMI data for both services and manufacturing to reflect growing economic stress as social distancing causes a sharp decline in demand. In this backdrop, what would the consequences to the world economy be?
Economies of Social Distancing
The world was experiencing a psychological isolation before Covid19 due to being addicted to Social media. Physical social interactions were hampered by the usage of smart phone and people didn’t value the intimacy much. However, with Corona coming into effect the value of social distancing is made mandatory. People are requested to stay away from each other and as a result instead of a psychological isolation, now everyone is experiencing true meaning of isolation. Isolation will be detrimental to those who live alone as there is no interaction that can take place at all specially during a lock-down. Despite its adverse social effects there will be many economic effects that are yet to surface. As flattening the pandemic curve is only possible through social isolation, there will be no alternative as doctors have clearly stated that the pandemic will go out of hands of the health sector unless social interactions are curtailed or brought down to zero. In this backdrop, it’s important to look at possible economic pandemics that can hit the society and the economy.
According to a paper by UC Berkley economist, Gournichas, if 50% of the world is infected, 1% of the world, 76 million people would die (This assumption is based on the available critical care beds and a 2% case fatality rate). COVID-19 infection begins with a 2-14 day incubation period before symptoms arise followed by severe flu-like symptoms for 2 weeks. At present, research suggests that approximately 20% of those who contract COVID-19 will need hospital treatment that is extensive. This puts significant strain on healthcare facilities as well as on the economy. Flattening the caseload curve is critical but it comes with an economic cost if other measures are not also taken. Governments are learning by doing when addressing the economic risks of closing the economy and asking citizens to engage in social distancing. Countries with higher levels of debt will require greater assistance by their governments to prevent “L” shaped economic downturns. Even with substantial government assistance, “L” shaped downturns may be unavoidable.
Impact of social distancing on sectors
Global restaurant diners were down 89% year-over-year as of March 18th. Data suggests this will fall to a 100% decline and remain there for several weeks. Restaurants are a useful proxy for person to person retail activity. Many restaurants, already operating on thin margins, will be forced to lay off staff and/or close in the coming weeks. Weekly unemployment claims in the U.S. surged 33% wk/wk data released for the week of March 14th. Even though Sri Lanka has 64: 36 split between Rural and Urban sectors, more than 50% of the GDP is made in the Western province which provides daily wages to many workers including restaurant, bakery and hotel workers, taxi and bus drivers, porters and helpers, salons and beauty parlors. If social distancing continues, it will have a detrimental effect on the families which depend on the breadwinners who are employed in the sectors which get hampered with increasing social distance.
Can Sri Lankan household handle the lockdown in the long run?
24% of U.S. workers do not have paid sick leave. This population is likely to be most vulnerable economically should the virus spread. Some large firms are able to change their policies in the face of the health crisis, but many are too small to offer such assistance. 9.4% of Americans do not have healthcare. This population be adversely impacted even with changes implemented to make testing widely available for free. Government assistance to those most in need is critical, but will likely be too late to avoid lost consumption for a month. (Refer the graph below)
In the Sri Lankan context, it will be far worse and there will be few who have enough resources to sustain the shutdown but there will be misfortunate majority who will not have resource ownership to sustain the shutdown/ lockdown. This would lead into social problems and social unrest. But the silver lining in this dark cloud is that in Sri Lanka, especially the rural sector can survive with their own food for few months as the natural resources in Sri Lanka (Rural Sector) will allow people to survive in the short-run. Lower wage workers are less likely to have savings and are the most likely to be unable to meet even non-discretionary spending needs. This will have an impact on the overall well-being of the society.
What will the GDP growth be like?
The biggest impact will be due to lower consumption, weaker business investment (as firms engage in precautionary behavior due to elevated uncertainty), and lower inventory accumulation arising from a combined supply shock and weakened demand. Q1 GDP growth could show a significant impact from COVID-19 due to a complete shutdown of economic activity in March. Second half of February, the whole month of March and the first half of April are the best months for Sri Lanka as far as the economic activities are concerned. This is the season in which agriculture sector at their best and as a result of that the spending in the rural sector is at its peak and overall the best month for all the consumer-focused manufacturing and distribution companies etc. traditionally the last two weeks of April wouldn’t show a considerable economic activity but the cumulative volumes made in February, March and first half of April always cover up the last two weeks of April. Though there was a terrorist attack last year (2019) it was after the season hence, the damage on the economy was not as worse as 2020.
What we can do as Sri Lankans?
We Sri Lankans have gone through many devastating crisis situations in the past few decades from terrorism to Tsunami floods and draughts. There has never been any smooth sailing. This should be taken as a challenge and face it with positive vibes. Of course there is social isolation, dropped incomes or no-incomes and fear. But the best way to look at it is to be more real and authentic and get into a simple life style. Being simple and real or authentic will always allow one to handle any situation well. A potential recession is knocking on our doors and we are yet to figure what problems and issue to be faced in next few months to come. The entrepreneurs and the corporate sector has to opportunity to look beyond boundaries and think out of the box to identify new opportunities which are more need-based than want-based. Agriculture, healthcare and online retailing will reach new heights in time to come. However, there will be short term, medium term and longer term impacts that should be tackled at national policy level/government level, corporate sector level and domestic level. The crying need of the hour is to be resilient, optimistic and hopeful, whilst adhering to medical and security instructions which are imposed for our own good and benefit.