BY ACHINT ARORA
A recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. However, the National Bureau of Economic Research (NBER), defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. As restaurants, airlines, shops, factories are all shut down around the globe, we could be staring at a global recession very soon.
The COVID-19 outbreak is a catalyst to the economic crisis the world is facing right now. It has not only disrupted the demand side but also the supply chains by first attacking unprepared China the Factory to the world and then spreading to other parts of the World.
The virus hit the world economy at a time when it was already showing signs of weakness — deficits and debt at all time high, especially in the US. We cannot borrow our way into growth by using more of debt. The more we grow, the more we owe. The US economy has been rather postponing recession since its trade war with China but the COVID-19 Virus has preponed the slowdown which could have otherwise occurred in 2-3 quarters of 2020-21.
Economies are at a halt, businesses are shut, global travel has slowed drastically — all this could lead to huge layoffs in the times to come. Many businesses, especially small businesses, are facing a cash flow crunch, sales are not happening but they still have payroll, suppliers payments, taxes to be paid. This is the time the government should intervene and make sure they get through the period. China Manufacturing Activity is at an all-time low, pollution levels across China tells you the Chinese economy has come to a halt. International trade flights have been cancelled, air shipments has taken a hit, international shipping is at a halt. We have never faced anything like this.
It will take a lot of time for people to come out of this and join back work due to fear post the isolation period. Conferences, events, sporting events — all these make a huge impact. The businesses are going to have massive layoffs especially in travel and tourism. The economic and financial system impacts are gigantic and are accumulating. The central banks all over the world are doing the best they can by bringing down interest rates to an all-time low. But, low interest rates cannot really help combat a virus or encourage frightened people to go the theatres.
The Federal Reserve has already taken a step to give payroll tax holiday to US employees. But, if you are unemployed, you don’t benefit. No Income, No Tax. Priority should be to give direct cash in the hands of US citizens. The only solution to contain the virus is social distancing and lockdowns. This is different than the 2008 crisis since it was more or less limited to the housing sector, the other sectors of society were functioning smoothly. People were going out to restaurants, theatres, events, etc. This time, it’s different and the consequences will be different. These are the most uncertain times. Yes, COVID-19, is a real disaster, and attempting to contain it will be unbelievably costly. It didn’t have to be this way.
BY ACHINT ARORA