Covid-19: why the economy could fare worse than you think | The Economist

published on July 2, 2020

China is bouncing back from the effects of coronavirus

And the world is watching

to see what they can expect from life after lockdown

China’s economy is now functioning at around 90% of normal levels

90% is an incredible achievement

But in practice it will feel very, very strange

A 90% economy may not sound too bad

but for many it could be catastrophic

Some of the worst unemployment numbers in this country’s history

66m plus people laid off in a single week

It wouldn’t be that surprising if we think we’re kind of through the worst of it

we end the lockdown and then actually then things start to get even worse

As global lockdowns ease

the economy faces the greatest challenge in living memory

Here’s what you need to know

In China, factories are up and running

Classrooms are full Restaurants are open

But the economy has not returned to normal

In fact, it’s operating at around 90% of usual levels

And as lockdowns ease elsewhere, this “90% economy”

could be what the rest of the world has to look forward to

Regardless of how countries have dealt with the pandemic

it’s becoming clear that once businesses have to operate

with social distancing in place

the economy can be expected to shrink by about 10%

whether that is in South Korea, America, or Sweden

But the missing 10% will mean life will feel far from normal

In China, large chunks of everyday life are missing

Having collapsed in January

consumer footfall has recovered to about half its previous levels

Hotel occupancy is still down by around 50%

And 75% fewer people are flying

What’s mainly in the missing 10% is stuff that

is hard to do if you’re trying to social distance

So, things like restaurants and hotels, theatres, cinemas

And crucially, it’s also the way in which people tend to have fun

So, it’s a world where you work, and then as soon as the day is over

you immediately get back to your house as fast as possible

This dip in so-called “fun spending” will continue

even after lockdowns are relaxed

In Sweden most people were never asked to stay at home

during the pandemic

But Swedish spending patterns over the past few months

have mirrored those in neighbouring Denmark

which has been under lockdown

Daily restaurant turnover fell by 70% last month

as uncertainty over the economy and fear of infection

meant fewer Swedes ate out

And while overall Danish spending fell by 29% during lockdown

Swedes cut their spending by almost as much

What the evidence suggests now is that actually

it’s people’s own voluntary decisions about how they behave

which are shaping economies

actually more than what the government is telling people to do

The lockdown itself is not really influencing behaviour that much

The true economic impact of imposing lockdowns will take time to emerge

In China it was several months after the lockdown began to be lifted

before bankruptcy numbers started to rise

It wouldn’t be that surprising if we think

we are kind of through the worst of it

we end the lockdown and then actually then things start to get even worse

than we had expected

For the past few months the global economy has been

propped up by unprecedented levels of state aid

In Europe’s five largest economies

one-in-five workers is currently in a special scheme

where the state pays their wages

The government has deployed €750bn to sustain companies

That’s unprecedented

The government is going to step in and help to pay people’s wages

It’s only as this support is gradually withdrawn

that the wider cost of covid-19 will become clear

It will feel quite sort of uncertain because, you know

no one really knows how businesses and households

are going to be able to survive weeks and months of much lower incomes

It will impact all levels of the economy

Let’s take a look at one scenario

A small-business owner runs a chain of restaurants

When the pandemic hits, he takes out a loan and furloughs his staff

He is not alone—in March, more cash was handed out to UK businesses

than in any month since records began

After lockdown, he re-opens But business is slow

So, he makes staff redundant

And closes a restaurant as he can’t pay the rent

This has already been happening

In the first quarter of the year, the share of commercial tenants

who paid their rent on time in Britain fell from 90% to 60%

With big firms like Burger King

admitting they couldn’t make rent on empty restaurants

Without these rent payments

his landlord can no longer keep up with her mortgage

And ultimately her bank is left with debt that cannot be repaid

The problem with all of these losses across the economy

is that someone eventually has to admit that they are going to

bear these losses, and the consequences of that

for business confidence and for investment could be very significant

If you are concerned that your customers, or your tenants or whoever

is not going to actually be paying the money they owe you

then making new investments is not just risky

it’s actually completely impossible to price because everything is so unstable

And so the risk of that is that things like investment get cut back massively

and that will, you know, that will have very large effects

Key economic factors already indicate

that the world is facing a prolonged recession

Already unemployment in America is at its highest rate

since the Great Depression

But these losses will not be felt equally

To see how, let’s go back to our restaurant owner

The industries hit hardest by the covid-19 pandemic are labour intensive

and rely on an army of low-paid workers

And it is these people who are particularly likely to lose their jobs

In America you are already twice as likely to be made redundant

if you are earning less than $20,000 a year, than $80,000 a year

The kind of jobs that won’t exist at all or in much-reduced numbers

will be the kind of jobs that are typically done by people who are paid less

Jobs that are done by women and jobs that are done

by ethnic minorities more commonly

So, that’s jobs in things like leisure, hospitality

retail trade and that kind of thing

And so, I think you could expect unemployment to be

really concentrated in certain groups

And these economic changes will shape the political agenda

in the post-lockdown world

You could imagine a situation where it becomes kind of commonsensical that

the essential workers, who’ve kept the economy going

you can imagine a push towards trying to improve

their standard of living and standard of work

On the other hand, you could imagine a situation where

countries kind of close in on themselves and say, you know

we don’t want immigrants because immigrants bring disease

and we want to make sure that we have capacity to

build vaccines for our citizens, for no one else

It’s too soon to know which way the political tide will turn

and each country’s response will be different

But one certainty is that the longer we all have to wait

for a vaccine to be developed and distributed

or effective treatment found

the more pronounced the effects of the 90% economy will be

My name is Callum Williams I’m senior economics writer at The Economist

If you want to read more about the economic consequences

of the coronavirus pandemic, then click the link opposite

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