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Covid-19: Redefining The New Normal

By: Chan Wei Qi, Ng Yu Xin

Editor: Sakshi Sanganeria



Abstract


Covid-19 is described as one of the greatest economic disruptors of the decade, leaving businesses and households experiencing a strain that is arguably worse than the 2008 Financial Crisis. This article analyses the short and long term impacts of Covid-19 and evaluates the future of the global economy as humanity overcomes the pandemic and adapts to the new normal.

Short term:

1.1 Impacts

1.1.1 Economic Growth

Aggregate demand shocks have been exacerbated by lockdown measures, especially for domestic consumption dependent countries like the US with 68.1% of household consumption as percent of GDP (The Global Economy, n.d.26​​). Countries land into credit crunch, with banks tightening criteria for loans against the favour of higher-risk and subprime borrowers (CNA, 20206​​), and rising costs of borrowing decreasing purchases. Companies dependent on international trade see a decrease in revenues and are unable to service their dollar-denominated debts (Turner, 202028​​). This puts

struggling companies at risk of bankruptcy, and others less willing to invest.

Similarly, aggregate supply is badly hit, with major supply chains in China disrupted as factories close down, signalling a serious economic contraction leading to reduced industrial production (Barua,

20201​​) .



Figure 1: Movement of Aggregate Demand and Supply in the Short Term

In the short run, the drastic fall in aggregate demand for non-essential goods and services will offset the rise in aggregate demand for essential goods like healthcare products. The decrease in supply and

demand leads to a disinflation and decline in GDP, with a predicted global growth of -3% (International Monetary Fund, 202031​​).

1.1.2 Unemployment

According to the International Labour Organisation, the coronavirus could claim 24.7 million jobs globally (International Labour Organisation [ILO], 202011​​) as the industries bearing the brunt make up

37.5% of global employment (United Nations News, 202029​​).

Rising unemployment is attributed to cyclical unemployment. The rise in safe distancing measures and consumers’ expectations of an impending recession have decreased demand for goods and services (Ministry of Manpower [MOM], 202018​​). Hence firms will produce a lower level of national output, and derived demand for labour falls (Ting, 202025​​).

1.1.3 Inequality

Covid-19 exacerbates inequality worldwide. Within the country, workers in the informal economy have been hit the hardest with a drop of 60% in their income globally (ILO, 202010​​). ​With the

imposition of mandatory remote work, the lower-skilled and low-paying workers are

disproportionately affected as jobs that can be carried out remotely tend to require highly-skilled manpower (Bergamini, 20203​​).Lower income households also tend to have less savings to turn to and households with higher incomes are more able to recover than those at the bottom (Organisation​ for Economic Co-operation and Development [OECD], 202020​​).

Furthermore,​ based on previous pandemics, workers with basic levels of education face a sharper decline in employment than workers with higher levels of education (Illustrated below)

Source: VOX CEPR Policy Portal

Amongst countries, low- and middle-income countries see a higher proportion of workers in informal employment and with limited access to health services and social protection (ILO, 202010​​). The drop in income of informal workers differs across countries as different proportions of the workforces are employed in the hardest-hit sectors (ILO, 202012​​).

1.2 Government intervention

1.2.1 Measures in place

In response to the economic downturn due to the pandemic, government bodies have rolled out fiscal and monetary policies including financial support for public health institutes, lowered interest rates,

one-off payments to residents and extended loans and tax payments (Martyr​& Mukhopadhyay,

202017​​).​

1.2.2 Limitations of fiscal policies

While fiscal stimulus is helpful, it is insufficient in resolving the economic problems entirely (Fisher Investments UK, 20207​​). Fiscal policies focus on increasing demand, but are unable to tackle the decreased supply. Even if consumers and businesses are willing to spend, if businesses are unable to supply, the rise in national income will still be limited.

Furthermore, fiscal policies are limited in their ability to increase demand. Compared to the financial crisis, where demand decreased mainly due to decreasing consumer confidence, in the pandemic,

there are other factors.

For instance, fiscal policies like a tax cut are insufficient in raising consumers’ demands due to stay-at-home orders (Fisher Investments UK, 20207​​). Instead, virus control is crucial in aiding economic recovery as discretionary spending will improve once the virus is under control (Pandey A., 202023​​).

2.0 Long term:

2.1 Cost of policies

2.1.1 Impact of policies on reserves

Fiscal policies affect the government budget in two ways. Dispersing funds increases government expenses, while reducing taxes decreases government revenue. Taxes are reduced through lower value added tax, and the natural effect of a slowed-down economic activity and employment resulting in the reduction of personal income tax and corporate income tax collection (OECD, 202022​​). Hence tax revenues tend to fall faster than GDP when GDP growth is limited or negative (Belinga et al., 20142​​). While the exact effects of the pandemic on the global GDP is still uncertain, early estimates have suggested a significant impact on tax revenues (OECD, 202022​).​ Hence, the use of fiscal policies incurs an opportunity cost in terms of the next best alternative way the government budget can be

spent.

2.1.2 Inflationary risk

Authorities should be wary in managing the containment, fiscal and monetary policies. If stay-home policies are relaxed suddenly, coupled with the fiscal and monetary policies being introduced, there may be significant pent-up demand in the economy (OECD, 202022​​). Conversely, supply may face a limited increase as supply chains need time to be reformed and built, alongside the uncoordinated reopening of businesses globally, and are unable to offset the increase in demand. With the economy’s spare capacity being used up gradually, the competition for scarce resources will cause the firms to bid up factor prices, resulting in inflationary pressures which are further exacerbated by the

multipliers effect.


Figure 2: Graph showing inflationary risk in the economy in the long term

2.2 Factors affecting recovery

Speculations by investors on whether a “V-shaped” or a “U-shaped” recovery is expected in the

economy (JP Morgan, 202013​​) is largely influenced by the below discussed factors.

2.2.1 Households’ expectations of future economy

The fall in labour demand, exacerbated by reduction of business hours and work-from-home

regulations, leads to unemployment and income volatility (Sheiner&Yilla, 202024​​). Consequently, consumers may be less confident of the future, and spend less as they try to pay off accumulated debts and maintain a stable income. Hence, recovery depends on the government's abilities to alleviate households’ expectations of the future economy.

2.2.2 Sustainability of government finance

Government bodies are facing a huge financial strain and need to consider new measures to raise revenue as the use of fiscal policies greatly affects budget balances and public debt levels (OECD, 202022​​). Compared to the global financial crisis where budget deficits skyrocketed to 8.7% of GDP and public debt grew from 73% to 101% of GDP, the pandemic is expected to have a larger impact on the economy (OECD, 202022​​). Coupled with the unpredictable duration of the pandemic, the recovery is dependent on the government’s ability to find more sustainable methods of financing the economy.

2.2.3 Businesses’ expectation of future economy

A large part of the recovery depends on business investment and innovation stemming from business confidence. Overall business sentiment for the next six months fell to a record low of 48.3 on the SBF Experian SME Index (Williams, 202030​​), while business sentiment fell to -7.88 percentage points in the second quarter (The Straits Times, 202027​​). Foreseeing the long term outbreak, disrupted supply chains and fall in consumer demand, businesses will not prioritise investment or research and development. Though central banks are reducing interest rates, this incentive pales in comparison with the fall in business sentiments that if not lifted, may lead the economy into a downward spiral (Narwan, 202019​​).

2.3 What is the new normal?

2.3.1 Future of technology in businesses

Countries worldwide are gradually entering the digital economy, accelerated by the rise in adoption of technology platforms in businesses and leisure during lockdowns, such as Zoom (Caimi et al., 20204​​). Furthermore, people leverage on Information and Communication Technologies (ICT) to aid

development of telehealth and contact tracing. The new normal would entail new ways of operations, as companies refine their digital roadmaps to enter a long term strategic position (Caimi et al., 20204​​).

The adoption of ICT and automation is a double-edged sword with rising security concerns. COVID-19 themed phishing emails, misuse of personal data and weak encryption policies are increasingly common, with online platform Zoom put in the spotlight for security issues like “Zoom Bombing” (O’Flaherty, 202021​​). Hence, active steps need to be taken by the state and virtual platform service providers in identifying and responding to cyber threats to build the bridge of trust with users, a crucial aspect for a smooth transition into the digital future.

The adoption of technology may also increase unemployment unequally. The mandatory remote working in many countries has pushed companies towards capability development, in particular, pushing companies to discover technologically efficient methods to increase productivity with less manpower (Global News, 20209​​). This is crucial for workers with jobs facing the threat of automation as once more cost efficient and productive methods are developed, less labour will be required. This suggests employment rates may decrease even after the economy recovers from this crisis.

2.3.2 Rise of local supply chains

Covid-19 stresses the importance of having a sustainable supply chain that is not drastically disrupted by uncontrollable events such as a pandemic. It also questions the supposed importance and benefits of globalisation (KPMG, 202015​​). Leveraging on this learning point of supply chains vulnerability, the new normal includes businesses diversifying their supply chains instead of relying on export giants (Lin &Lanng, 202016​​). There is also a popular trend of decentralisation, where companies move parts of their supply chain back home (Lin &Lanng, 202016​​). Reviewing supply sources will form more ‘crisis-proof’ and self-sustaining supply chains. Shifting certain supply chain processes locally is supported by government relief schemes and increased local manufacturing and end consumption.

3.0 Conclusion

Pandemics like Covid-19 are unforeseen. They have resulted in unrecoverable damages and, at the same time, shed light on subtle issues in the economy. As we move forward globally, the timely response by the government as well as the ability for businesses and households (to adapt to and embrace new technologies)is crucial in building up resilience in the economy in the future.

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