Question

Discuss some of the macroeconomics effects of the recent COVID-19 outbreak on the global economy.

Answer 1

The macroeconomic effects of Cornovirus are indeed adverse and relate both to supply and demand factors.

Most firms face a broken supply chain - workers are not tuning for work and raw materials can not be procured, especially those which are imported as there are several restrictions on the movement of goods and people by most of the governments - their production level has gone down considerably and thus there is a negative supply shock. As a result, firms. face mounting losses and in order to minimize them, they engage in large scale layoffs. The unemployment rate rises considerably. This leads to a fall in the income levels of the people as unemployment rises and with lower incomes, people's purchasing power declines, and they consume less. Thus the aggregate demand in the economy goes down and there is a very strong negative demand shock. This further aggravates the economic loss and the GDP of the country (and the entire world is plummeting). Since the government has to undertake large scale spending in the healthcare sector and in supporting the poor as well as unemployed, government fiscal deficits and borrowing will increase to unprecedented levels. Monetary policy easing will make the policy rates decline to the zero lower bound, and sometimes negative to boost the economy. International trade is going to come to a sudden top as restrictions are imposed on goods and people and governments across the world focus on satisfying the domestic needs first as opposed to exporting their output. Many small and medium scale firms who can not sustain long lockdowns will go out of business and shut down. The economic loss for COVID-19 has already been touted to have surpassed the 2008 global recession with no improvements in sight.

Thus, due to both severe demand and supply shocks, economic growth is going to face its toughest challenge in a long time in the recent few months (possibly years) as the COVID-19 pandemic continues to wreck markets and economies globally.