Methodologies

Methodologies employed to assess the impact of COVID-19 on the economy

Various methodologies have been used to determine the impact of the coronavirus on the world’s economies. Maliszewska, Mattoo and van der Mensbrugghe (2020), have found that in the global pandemic scenario, if the world’s GDP falls by 2% below the baseline, developing countries would see their GDP fall by 2.5%, and industrial countries by 1.8%. In the amplified pandemic scenario, the declines would be double in comparison. Under the amplified global pandemic scenario, global GDP decline would reach 3.9%, with the regions most integrated through trade and/or where tourism trade plays a big role in the economy facing the biggest GDP losses. Countries of Sub-Saharan Africa (SSA) together with those of the Middle East and North Africa (MENA), would be the least affected under both scenarios, with an estimated GDP loss of around 3%.

The authors have achieved these results by identifying four sets of shocks to trade which they assume occur simultaneously:

  1. A supply shock consisting of a drop in employment,

  2. A raise in the cost of international trade imports,

  3. A sharp drop in international tourism and travel-related services, and

  4. A demand switch by households who purchase fewer services requiring close human interaction, such as mass transport, domestic tourism, restaurants, and recreational activities, while redirecting demand towards consumption of goods and other services.

They consider two scenarios: a global pandemic and an amplified global pandemic. In the case of the global pandemic, it is assumed that countries bear only one-half of the impact of the full China shock. In the case of the amplified global pandemic, the shocks are uniform across all countries.

 

How does the Pandemic affect countries’ supply and demand capacity?

On the supply side, health issues are reflected in reduced activity in all local economic sectors, including tradable sectors such as manufacturing. Specifically, mortality and morbidity are traditional causes of the loss of productive workforce whenever academia tries to determine the impact of a health issue. Analysing the impacts of the Spanish flu, Correia, Luck, and Verner (2020) identified depressed labor supply through self-isolation measures, restrictions on mobility, illness, and increased mortality as the key issues impacting countries’ supply capacity. Similarly, the study by McKibbin and Fernando (2020) on the impact of the COVID-19 pandemic, identifies a fall in total labour supply, a rise in the risk-premium, and an increase in the costs of production in all sectors as the key supply-side impacts.

 

Probably the most striking impact of the current pandemic is the massive disruptions to international trade and global value chains (GVCs). According to Baldwin and Freeman (2020), the shocks to GVCs result for the most “globalised” economies in their manufacturing sectors facing “triple hits”:

  1. Direct supply disruptions hindering production since the disease is focused on the world’s manufacturing heartland (East Asia), and spreading fast in the other industrial countries.

  2. Supply-chain contagion amplifying the direct supply shocks as manufacturing sectors in less-affected nations find it harder and/or more expensive to acquire the necessary imported industrial inputs from the hard-hit nations, and subsequently from each other.

  3. Demand disruptions due to

    1. macroeconomic drops in aggregate demand (i.e. recessions);

    2. wait-and-see purchase-delays by consumers; and

    3. investment-delays by firms.

 

On the demand side, the most immediate trade impact of the novel coronavirus pandemic has been the sudden surge of the global demand for COVID-19 related medical supplies, which exceeded current domestic production levels thus resulting in increased import demand and simultaneously rising prices. Export restrictions introduced by major economies facing shortages further led to price increases that, according to the World Bank, could be, for example, 20.5% in the case of medical masks.

 

More importantly, pandemics persistently depress aggregate demand. Correia, Luck, and Verner (2020) note that, on the demand side, the pandemic acts through various transmission channels such as reduced household spending, and the increased business uncertainty about future demand which depresses business investment.

 

Maliszewska, Mattoo and van der Mensbrugghe (2020) point to the fact that lower availability of labour results in lower demand for capital, as firms need a combination of labour and capital to produce goods and services.

Analysing the long-run effects of fifteen large pandemics from the Black Death (1347-1352) through the H1N1 Pandemic (2009), Jordà, Singh and Taylor (2020), found that such major events could exert transitory downward shocks to the natural rate of interest over the medium-term (around 10-20 years). Investment demand is likely to wane, as labour scarcity in the economy suppresses the need for high investment. They also found that “savers may react to the shock with increased saving, either behaviorally as new precautionary motives kick in, or simply to replace lost wealth used up during the peak of the calamity.”

 

McKibbin and Fernando (2020) point not only to a fall in aggregate consumption demand, but more importantly to distorted usual consumption patterns and resulting market anomalies due to panic among consumers and firms as preferences for certain activities change with the outbreak. On the demand side, McKibbin and Fernando (2020) also take account of the shocks from increased health expenditures to contain the spread.

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