Out of the Frying Pan and Into The Fire: The Economic Impact of Covid-19

Well, who saw this 2020 coming?

Lockdowns are lifting all around the world, perhaps optimistically, now that the risk from the virus itself seems to be decreasing. Whether this is a good idea will probably be debated for quite a while, and ultimately, there is no way to tell in the short term. It’s pretty obvious why we’re coming out of lockdown before the virus is actually eradicated. The debate is shifting from how to protect people from a public health standpoint, to how to manage the economic effects.

Tl;dr – The economic effects of Covid-19 are likely to be the most significant in almost a 100 years. For a few years, we can expect to see a huge worldwide recession/depression. However much remains uncertain, dependent on whether we see a second wave of infections and on how other countries handle the economic effects.

The coronavirus crisis has led to the most significant economic recession since The Great Depression. Worldwide unemployment is likely to climb to a level unseen in almost a hundred years. The less wealthy, young people and women are all likely to be disproportionately affected by the economic impacts. How bad are we really talking though? 

Well the FTSE 100, which is essentially a measure of the share price of the 100 biggest companies in the UK, is down by 20% since January. Nearly every global economy is due to experience a severe recession, according to the OECD. UK GDP fell by 2.2% in the first quarter of 2020, which is the largest fall since 1979. In the second quarter, the bite from lockdown is expected to hit, with the IMF predicting that the UK economy will contract by approximately 30%. This is, by far, the largest contraction on record. The OECD predicts that UK unemployment will triple, even in the most optimistic recovery scenarios. 

Why?

So why are we seeing all this happen? We’ve had economic crises before, why is Covid so different and so damaging? According to PwC, the economy is affected in five major ways:

  1. Lockdowns – people can’t go to work, shops don’t open and people end up spending much less. This leads to a huge, huge loss in GDP as well as businesses shutting down. This is something that is immediately benefitted by easing lockdown, but isn’t going to get back to normal while there is still a level of social distancing

  2. Supply chain disruption – for example, businesses can’t get some supplies they made need to operate, because their suppliers haven’t fully opened yet. This slows down the recovery of the economy, but is also expected to get better in time. 

  3. Labour supply reduction – There are fewer people available to work because they may be ill or may have to care for children (with schools closed). This means that the economy cannot get back to full capacity as quickly. Again, this should get better with time and schools reopening. 

  4. Uncertainty – people decide to save rather than spend due to fears about the future and lenders become more risk-averse which can drive up the cost of borrowing. This has by far the biggest negative impact on the economy and is unfortunately the hardest thing to remedy.

  5. Policy reactions – A major source of uncertainty is how governments are going to respond. Within the UK, the Bank of England and Treasury have begun one of the largest stimulus packages in history, to protect jobs and try to reinvigorate the economy. All indications are that this is a good thing. However, Brexit is a huge source of uncertainty and any future trade deals will impact recovery. 

Whilst lockdown is the only way to manage to health crisis of the virus – as we’ve seen with the botched lockdowns and surging virus cases in Brazil, Sweden and the USA, it is also something of a poisoned chalice. It leads to significant, albeit completely predicted, damage to the economy. In the short term, this is fine. However, after more than a few weeks of lockdown, there starts to be structural (long-term) damage. This could manifest in different ways, for example companies unable to trade going out of business, leading to jobs disappearing. In particular, the aviation and travel industries seem to be in real trouble. The complete lack of any business for a few months is bad enough, but the demand for flights is still low, even as lockdown is lifting slightly. You probably have also seen articles spelling out the risk for theatres, sport and hospitality. There are virtually no industries that will not take a huge hit due to coronavirus. In fact, according to PwC, the only industry that has not shrunk by greater than 5% is the civil service. 

Is it all bad news?

We are undoubtedly at the start of an economic crisis the likes of which even our grandparents have never seen. But there are some things to be positive about. Though the reduction in GDP due to lockdown has been unprecedented, it was also completely expected. This means that some steps have already been taken to mitigate it, such as the furlough scheme or the Bank of England taking some quite radical steps to control the economy. In fact, the governor of the Bank of England, Andrew Bailey, has said that he believes we are past the point of maximum damage to the economy. 

We are already seeing some positive signs from lifting lockdown. Analysis from the Treasury notes that, with the reopening of some shops, the retail sector is already beginning to recover. Around 79% of businesses are now trading again, and only 0.5% have been forced to cease permanently. If, and it’s a big if, there isn’t a second wave of infections, we should expect to see the economy bounce back somewhat, and then slowly recover. It’s believed that GDP won’t be back to 2019 levels for at least a few years however.

Another, more subtle, benefit is the chance for rebuilding. Hopefully, in the wake of this crisis, the chronic underfunding of the healthcare system will begin to be reversed and we’ll all have a much greater appreciation for the work that the NHS does. The government has indicated that it will promote a “green recovery”, offering incentives to try to get businesses to rebuild in an environmentally sustainable away. This is absolutely crucial for the future, especially if we intend to prevent some environmental disaster causing much worse economic effects in 20 years., 

One of the reasons that the lockdown has been so devastating is that most of our industries operates a “just-in-time” system for its supplies. This means that firms try to cut costs by minimising their supplies they hold, i.e. companies only buy in what they immediately need and try to have nothing in storage. This is actually the reason why we saw food and toilet paper shortages at the start of lockdown – supermarkets only stock enough to provide for “normal” purchasing. PwC have predicted that with the chaos caused by this in the early days of lockdown and due to continued difficulties getting supply from abroad, businesses may swap to a different model that prioritises stability rather than efficiency. 

So what are we actually going to see happen?

Unfortunately, it is almost impossible to say. Most economists predict that we’ll see an immediate bounce back once lockdown lifts, followed by a more gradual recovery over time. The IMF predicts that it will take several years for the UK economy to reach 2019 levels. However, this is the most optimistic scenario. If we see a second wave of infections which requires a reintroduction of lockdown, then the economy will likely take another hit. This could make the recovery much slower and much “bumpier”. This fear of a second peak is ultimately the leading cause of uncertainty.

Through immigration, trade and tourism – the recovery of the UK economy is clearly tied to the global economy as well. The uncertainty that we’re seeing in the UK is replicated pretty much everywhere. Continued tensions between the US and China could slow down recovery, as could protectionist trade policies which reduce international cooperation. The World Bank and IMF have called for global economies to coordinate their response to coronavirus and rebuild with stability and the future in mind. We probably won’t see the long term impacts of this response for a while.

On a more microeconomic level, you might be wondering how this is going to affect you. And I’m sorry for saying this so often, but it’s really hard to say. The likelihood is that there are going to be far fewer jobs for the next few years, and there may be a permanent reduction in jobs in the tourism and aviation industries. Interest rates will be low for a few years, and lenders may well be particularly risk-averse, making mortgages more expensive. If you are finding things particularly hard, or are worried about the economic impacts, please talk to someone. A good place to start is mind.org.uk (https://www.mind.org.uk/information-support/coronavirus/).

So that all seems rather bleak really. And ultimately it is. The short answer is that no one really knows what’s going to happen next in the economy. The best we can do is follow government advice and above all stay safe. If you’re interested, and want to keep yourself up to date with what’s going on, there’s several places you can look for information: 

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Written by Griffin Farrow

I’m Griffin – hi! I’m a PhD student in Physics in London, and yep, that makes me about as boring as it sounds. In my spare time, I try to work out what to do with myself. I’m new to this writing thing, so please be sympathetic!

PoliticsJessica Blackwell