Rolling Recessions Are The Likely Economic Impact Of New Coronavirus And COVID-19
The new coronavirus, which causes the new disease COVID-19, is the major uncertainty in the global economy, with the potential to trigger a worldwide recession. The path of the disease and its economic consequences are highly uncertain. Most likely, the world will see rolling recessions as the disease spreads to different areas, with economic recovery as the local epidemics die down.
A coronavirus forecast comes not because the future is known with high certainty, but because businesses are making decisions every day that depend on the economic outlook. The rolling recession prediction is the most likely as of today (March 10, 2020) but may change as new information emerges.
The economic impacts of quarantines and travel restrictions are probably more severe than the direct effects of death and illness. Thus, we are trading off sickness against economic growth. Usually a strong economy bodes well for health, as prosperity brings better water and sanitation, better nutrition, more and better healthcare services. In fighting this epidemic, though, health and the economy come into conflict.
So far, countries that have been hard hit have chosen to protect lives through quarantines and other restrictions, such as limiting public gatherings. Countries in the early stages of epidemic—including the United States—are delaying such action until sickness spreads widely.
For a gauge of what we might expect, the illness in Hubei Province of China may be useful. In January, new cases averaged 230 a day. For the next two weeks, new cases averaged 2,319 per day. Then new cases dropped, to where it's now just 36 per day (as of this writing). The total infection rate is now 1.1 per 1000 residents, and it seems likely to level out at about 1.2 per 1000. The many deaths are a tragedy, but for most people it was a week or two of misery, followed by recovery.
Hubei's experience may not be ours. The rest of China has slowed, with a much lower case count than Hubei despite a hugely larger population. South Korea, one of the three countries outside of China with the highest caseload, seems to be starting to slow down the number of new cases.
How long the epidemic will last is guesswork, but past diseases seem to follow a pattern of the worst epidemics ending quickly, while milder outbreaks persist and then flare up again. The disease may end with warm weather, but it may also become seasonal, like colds and the flu. In that case, look for more illness next winter.
Working assumptions for this economic forecast are that the disease spreads widely around the world, causing illness and some deaths, then peters out over the summer. This is a highly speculative projection, though.
Short economic downturns are likely in each country affected, though on different timelines. The China evidence suggests manufacturing and transportation are recovering. If this pattern holds, then we'll see about one quarter of decline, not the two quarters we usually use as a benchmark of recession. There may, however, be lingering effects.
On the demand side, spending will be depressed as people avoid shopping malls, theaters, restaurants, and as various restrictions (quarantines, travel limitations, etc.) are imposed to contain the virus. People who are unable to work for these reasons will have less money to spend, though people with stable incomes will end the month with more money available to spend after the epidemic is over.
On the supply side, many companies are not able to get shipments from China, and soon from Italy's manufacturing base. These supply chain effects will trigger additional supply restrictions, as well as reinforced demand reductions as workers are sent home for lack of raw materials to process. Chinese factors make medical supplies, aggravating the shortages triggered by the surge in medical needs.
Thus, 2020 may be a year with rolling slowdowns, pulling aggregate economic activity down worldwide. Most places will be in economic expansion for six to nine months of the year, so no global recession will ensue, but the pace of growth will be lower than otherwise expected.
a) Based on the article above, COVID-19 is a major uncertainty in the global economy. Explain why uncertainty in the economy is destructive for businesses. (10 marks)
b) Businesses are making decisions every day based on the economic outlook. Uncertainty in the economy can hamper their decision making. Suggest two (2) ways how businesses can reduce the risk of uncertainty in decision making. (5 marks)
c) Discuss, with appropriate examples, two (2) types of policy that the government can use to solve the recession. (10 marks)
d) Using a diagram, explain the impact on Chinese Yuan as China's exports plummeted due to COVID-19 epidemic. Discuss the implication of this situation on the businesses of Malaysian importers of Chinese products. (10 marks)
e) Based on the current global economic situation due to COVID-19 pandemic, state your opinion regarding Malaysia's ability to weather the economic repercussions of the pandemic. Substantiate your opinion using relevant economic theories and concepts. (10 marks)
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