Macroeconomics of Flu
The macroeconomic flu is a temporary negative supply and demand
shock, that is a temporary decline in output followed by a quick recovery. The
growth rates might slide in one quarter but recover the shortfall in the very
next too. In such cases, conventional policy actions from the toolbox suffice. However, this is not the case in a pandemic. The estimates from COVID-19 suggest large
downslides which may even be prolonged. The most extreme scenario of a severe,
temporary global pandemic presented by Warwick McKibbin and Roshen Fernando suggests
average GDP loss of 6.7%, with an 8.4% loss for the US and the euro area.
The size of the COVID shock would be determined by the strictness of measures by the governments to control the spread of the virus. This is because such measures would disrupt work process and therefore the supply chain. Example - Maersk, one of the largest shipping companies, has had to cancel dozen of container ships and estimates that Chinese factories are operating at half the capacity. More than 350,000 containers have been removed and there’s 49% fewer sailing from China.
On the demand side, transport and hospitality industries would take a big hit. IATA estimates that the aviation industry could face a loss of 29 billion dollars of revenues by extrapolating the impact SARS pattern. The size of the demand shock might be determined by dangers of infection and suggested official measures which would induce fear and uncertainty. Further, China had been a big market for Europe. For example – Sales in China accounted for 40% of the German car industry’s revenues. This temporary shock might lead to a downfall in durables expenditure in China as people would like to postpone such expenditures. This would dry up revenues for German firms.
The persistent effects could be seen in firms where firms might take into account that GVC’s might get broken by health shocks. This might put globalization at risk. Financial intermediaters and regulators might start including pandemic shocks into their stress tests. Also, in the time of rising populism, such fears about others might become a big force for disintegration.
The response of the policymakers on the monetary side has been conventional, that is, easing the rates. The Federal Reserve has already cut rates and other central banks have hinted of possible cuts. They should however also stand ready to provide liquidity in case of market disruption. However, given limited space monetary policy would have limitations. The fiscal policy might prove much better. Many countries have even started to declare fiscal stimulus like Italy and Germany.
To deal with global crisis leaders across the globe will have to come together again as once they did during the Lehman crisis. In Europe, the petty divisions should be put aside and the room should be created to pump in more funds and consider a common disaster relief fund as well. Government and policymakers should also send in a message of social cohesion, responsibility and leadership to prevent fear and panic. At the same time, they should communicate extensively and be transparent and honest about the possible measures.
The size of the COVID shock would be determined by the strictness of measures by the governments to control the spread of the virus. This is because such measures would disrupt work process and therefore the supply chain. Example - Maersk, one of the largest shipping companies, has had to cancel dozen of container ships and estimates that Chinese factories are operating at half the capacity. More than 350,000 containers have been removed and there’s 49% fewer sailing from China.
On the demand side, transport and hospitality industries would take a big hit. IATA estimates that the aviation industry could face a loss of 29 billion dollars of revenues by extrapolating the impact SARS pattern. The size of the demand shock might be determined by dangers of infection and suggested official measures which would induce fear and uncertainty. Further, China had been a big market for Europe. For example – Sales in China accounted for 40% of the German car industry’s revenues. This temporary shock might lead to a downfall in durables expenditure in China as people would like to postpone such expenditures. This would dry up revenues for German firms.
The persistent effects could be seen in firms where firms might take into account that GVC’s might get broken by health shocks. This might put globalization at risk. Financial intermediaters and regulators might start including pandemic shocks into their stress tests. Also, in the time of rising populism, such fears about others might become a big force for disintegration.
The response of the policymakers on the monetary side has been conventional, that is, easing the rates. The Federal Reserve has already cut rates and other central banks have hinted of possible cuts. They should however also stand ready to provide liquidity in case of market disruption. However, given limited space monetary policy would have limitations. The fiscal policy might prove much better. Many countries have even started to declare fiscal stimulus like Italy and Germany.
To deal with global crisis leaders across the globe will have to come together again as once they did during the Lehman crisis. In Europe, the petty divisions should be put aside and the room should be created to pump in more funds and consider a common disaster relief fund as well. Government and policymakers should also send in a message of social cohesion, responsibility and leadership to prevent fear and panic. At the same time, they should communicate extensively and be transparent and honest about the possible measures.
- Summarised from Beatrice Weder di Mauro's chapter in Economics in Times of COVID-19
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