COVID-19 is as contagious economically as it is medically. Unlike past pandemics this one is bigger (much bigger than SARS – 8,000 cases, 774 deaths) and has hit the ten largest economies in the world almost simultaneously. According to Centre for Economic Policy Research (CEPR), US, China, Japan, Germany, Britain, France, and Italy account for 60% of world supply and demand (GDP), 65% of world manufacturing, and 41% of world manufacturing exports. We Canadians often say, “When the US sneezes, Canada catches cold.” When these 7 nations sneeze, the whole world gets something a whole lot worse. Demand for restaurant seating, travel, wedding venues, summer festivals, milk and other farm crops tanks; supply of components for a myriad of manufactured goods in almost all countries gets interrupted.
It’s clear that the immediate fallout from the pandemic has been severe, global and many-dimensional. First and foremost, government imposition of social distancing and isolation as the only solution to the medical event is unsustainable. Humans are social animals, and they require social intercourse. Even a 3-month duration of shelter-in-place has shown a huge uptick in domestic violence, hostility and financial wreckage.
Now comes the second stage – tentatively re-opening the economy beginning this month. So what will it look like this time next year? Economists have many answers. (Ronald Reagan used to say that if Trivial Pursuit were designed by economists, it would have 100 questions and 3,000 answers.)
A V -shaped recovery assumes that the virus clears up by May or June and social distancing rules are relaxed. Pent-up demand is aided by the massive fiscal and monetary stimulus that policy makers have already deployed. Factories and services reopen for business smoothly. Government efforts to support laid-off workers is successful and unemployment recedes. As soon as the shelter-in-place rules are lifted, customers return immediately, and employees are ready to provide products and services. Economies return to their pre-crisis levels of output around the end of 2020.
One big question: how much of our changed behavior – ordering online, learning online, working from home, caution about eating out, travelling etc. – is permanent?
The slower U-shaped recovery assumes that it will take some time for customers to return and for business to be back to normal. Businesses that were open during shelter-in-place have an advantage as they were already in operating mode. For others, it will take some time to get employees back to work and to restart manufacturing facilities which had been shut down. Trade also remains sluggish as each trading partner is slow to pick up. Customers may have shifted priorities so will come back more slowly.
For some sectors, mainly services, the shock will be hard to recover from. Growth will eventually resume, but there will be no catch-up. In this L-shaped scenario, people continue to cut back on services spending — opting to keep with their home TVs — and taking “stay-cations”. Canadians had enormous household debt even before the economy shut down – this has been a frightening wake-up call to pay down debt and start saving. They are unlikely to double-up on dining and holidaymaking to catch up. The shock to tourism, transportation services, and domestic activities generally will not be recovered.
Nevertheless, overall recovery eventually materializes later in 2021, quickly for some sectors but much more lingering for others.
In the next article, we’ll tackle the one big question above: how much of our changed behavior – ordering online, learning online, working from home, caution about eating out, travelling etc. – is permanent?
Dian Cohen is an economist and a founding organizer of the Massawippi Valley Health Centre.
If you have any topics you would like Dian Cohen to explore in future columns, feel free to contact her at: Cohendian560@gmail.com