THE CORONAVIRUS PANDEMIC HAS CAUSED A GLOBAL ECONOMIC CRISIS
The coronavirus pandemic has been has had a major demand side and supply side shock to the UK economy and globally
How businesses are cutting cash flow
Delay or cancel dividend payments to retain cash rather than distribute to shareholders
Delay payments to key suppliers (e.g retailer are looking to defer rental payments in order to conserve cash)
Furlough staff to reduce employment costs and take advantage of wage subsidies
Monetary and fiscal stimulus UK (mitigation in action and how the govt is 'keeping the lights on')
Monetary policy (BoE)
-Base i.r cuts form 0.75% to 0.1%
-QE expanded by 200 billion pounds including purchases of coperate debt
Fiscal policy (round 1)
-Govt guaranteed i.r. Free loan scheme for businesses
-25,000 pounds grants for smaller businesses in hospitality and leisure
-Mortgage holiday for 3 month
-Abolition of coperate tax for 2020 for hospitality, retail and leisure sectors
Fiscal policy (round 2)
-(Historical in British context)Coronavirus job retention scheme: Govt coves 80% of salary of retained (furloughed) workers up to a total of 2500 pounds a month
-Deferral of buisness VAT payment until end of June 2020
-Universal credit allowance for next 12 month raised by 1000 pounds a year
Externalities
Negative externalities from a pandemic
-Macroeconomic fallout- lost jobs, higher taxes on future generations
-Risk of permanent loss of output (hysteresis effects)
-Social behaviour that spread infection (low private cost but high social cost)
-Panic buying
-Mental health impact
-Impact on inequality
-Difficult to put a value on human suffering and the social costs of state imposed mitigation policies (there will be vast social costs when the virus takes hold and spreads in lower income countries with fragile health systems and weak governance)
Positive externalities to consider
-Social distancing allows for external benefit
-Self quarantine allows for external benefits
-Virus testing gives external benefits
-Reduced pollution
-Increased community engagement
-Enhanced coperate social responsibility
Industries that have suffered:
CRUISE SHIP OPERATORS
HOTELS & B&B
AIRLINES & AIRPORT SERVICES
RESTAURANTS WITHOUT TAKEAWAY
SUPPLY CHAIN BUSINESSES
CONSTRUCTION COMPANIES
CINEMAS & THEATRES
EXAM TUTORS
SELF EMPLOYED
FESTIVAL ORGANIZERS
COMMERCIAL LANDLORDS
GYMS AND LEISURE CLUBS
Sectors that might have initially benefitted
Video streaming (Netflix, Disney +, Amazon Prime)
Healthcare products including sanitizers
Household cleaning products and DIY products
Sports / fitness equipment
Supermarkets / Restaurants with takeaway platforms
Logistics / delivery companies e.g. DPD & Deliveroo
Telecoms / Wi-Fi infrastructure providers
Online communication/conferencing apps (Zoom, Teams, Zwift, Peloton)
-online learning platforms (online courses, externships, webinars)
General impacts
Yields on 10 year govt debt has been below 1% (so govt should borrow and run up a budget deficit to stimulate the economy as the cost of borrowing is at historic lows )
Almost half of company bosses in 45 countries are speeding up plans to automate their buisness as workers are forced to stay home (many are investing in accelerating automation as buisness are preparing for post-crisis world)
Policymakers and politicians 'will do whatever it takes'. This implies large scale interventions and unorthodox policies
The coronavirus could cause a possible reverse in globalisation as China compared to the SARS epidemic when they accounted to 4% of the worlds growth, now account for more than 16% of growth. Globalisation has made the global economy more reliant than ever on China thereby creating systemic risk
How are businesses responding to reduce risk from the economic crisis?
Plant shut-downs (all major UK and European car plants have announced shutdowns)
Job lay-offs (we are seeing a sharp spike in unemployment figures)
Furloughing workers (keeping them on the payroll but not laying-off)
Shifting as many employees as possible to home working / skeleton office staff
Negotiating deferrals of fixed costs such as monthly and quarterly rent payments
Simplification of product ranges to boost production of key products
Some firms have pivoted production for social purpose (brewers making sanitizers)
Attempts to increase their online e-commerce capacity & capability
Some businesses are seeking to raise fresh equity capital from investors
Cutting back / postponing capital investment spending and on share dividends
Keynesian insight into coronavirus
-Monetary policy can play a role in vital counter-balance but can become ineffective in supporting demand due to low interests rates and liquidity trap
-Fears of a slump (reduces animal spirits) can become a self-fulfilling prophecy (this is because people save more, spend less, businesses cut back on production). Paradox of thrift can deepen a recession
-The govt has a key role in supporting the economy, they cannot just leave it to automatic stabilisers
-When private sector collapses the public sector (mainly via fiscal policy need to intervene to equilibrate the market)
Policy makers may need to be bold and challenge conventional wisdom to bring the country out of this crisis
Challenges (questions for the future)
-Fiscal deficit may increase as result of stimulus actions (taxpayers may need to pay off debt in the long run, there may be surges in inflation if fiscal stimulus is financed by central banks)
-Fiscal policy may not work (size of the stimulus is difficult to determine)
-Will the stimulus be followed by a period of austerity like in 2009? Post crisis management?
Coronavirus and Behavioural Economics
Pure Rationality has been ditched
-Emotions often overtakes logic in decision in times of crisis
-We often desire instant rewards in times of crisis (we want the crisis to be over quickly)
-Greater community action and growing importance our social networks
7 common behaviours (in times of crisis)
-Herd behaviour - panic buying (this may not necessarily be irrational as it is a classic common pool resource collective action problem where an individuals best response to other consumer behaviour is to panic buy), social distancing
-Status quo bias- following daily outlines/ strong default behaviour (difficult to change habits like washing hands, shaking hands, touching face)
-Loss aversion- we feel the effect of losses more than gains e.g. The loss of freedom of movement
-Normalcy bias (Ostrich effect)- pretending things haven't changed when evidence suggest they have
-Overconfidence bias- e.g. Young people underestimating the risk of contracting the virus
-One model thinking bias- we become too focused on thinking there is only one solution to a problem
-Zero risk bias- people want some certainty; they might take big step to reduce the risk to zero (e.g. Panic buying)