The Effects of Coronavirus on the Economy

We can outline four main channels of the transmission of economic crises' effects: the demand channel, the supply channel, the financial channel and the expectations' channel (for description of various channels see.

A combination of the general decline in incomes and consumer activity will be translated through the demand channel. Contraction of expenses will also occur as a result of the adopted quarantine measures, which sharply limit and primitivize the range of goods and services consumed. In addition, the scare of getting infected that may persist after the end of the first and possible subsequent outbreaks of the pandemic will also lead to a more cautious model of economic and social human behavior. In other words, the return to the pre-crisis pattern of consumption can be extremely slow, if at all possible. Tourism and entertainment industry, including commercial sports, festivals, concerts and other mass events, as well as catering and personal services will be affected most severely. Reduced working hours and possible layoffs will, all other things being equal, reduce household costs and increase the economic insecurity of those who are not protected by the social safety net.

Regarding the supply channel, widespread restrictions on the movement of people and cargo, as well as the stoppage of production activities in the most affected regions will lead to bottlenecks in global value chains. For a while, it is possible to maintain the normal functioning of these chains due to accumulated inventory, but sooner or later it will run out. Then many companies will be forced to close, striking the suppliers, consumers of their products and their own employees. In any case, the result will be a reduction in profits and wages, and thus the supply channel intertwines with the demand channel, and their effect is mutually enhanced.

The financial channel's mechanisms of transmission have been described quite well after the global financial crisis of 2007-2009. In particular, these include a striking downfall of markets and a noticeable increase in their volatility, margin calls' problem, liquidity outflow from risky assets ("flight to quality"), credit crunch for a wide range of borrowers who suddenly become unable to refinance and service their debts. The suspension of lending and other liquidity channels is a serious threat to the private sector in the face of downturn in economic activity.

It should be noted that according to the Institute of International Finance, global debt at the end of the 3rd quarter of 2019 approached $253 trillion, two thirds higher than at the beginning of the previous global financial crisis ($152 trillion). Current debt levels, at a record 322% of the global GDP, represent an important financial risk factor, both for borrowers and lenders at the micro-level and, regarding the buildup of a bad debt overhang turning the recession chronic according to the "Japanese" scenario (balance sheet recession) at the macro-level.

Finally, we highlight the expectations channel, as households and businesses anticipate negative developments and adjust their behavior respectively, exacerbating the crisis. Thus, the additional savings made by fearful individuals for precautionary motives lead to a further contraction of consumer activity. Growing uncertainty of the effects of the shock will also terminate well-prepared business projects and hold on the investments, deferring and slowing down the recovery. At this time these standard processes of negative expectations' formation are further spoiled by the factors of sanitary-epidemiological and structural uncertainty.