The global macroeconomics impacts of covid 19.

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The Global Macroeconomic Impacts of COVID-19

Introduction

The COVID-19 pandemic has been unprecedented by its global reach and effect, which has posed challenges to policymakers due to the indirect and direct effects within the interconnected world. The pandemic has been a global shock like no other, disrupting both demand and supply in a global economy. COVID-19 has disrupted lives across nations and communities, negatively influencing the economic growth in 2020 beyond anything encountered in more than a century before. This paper will focus on the global macroeconomic impacts of COVID-19. These include inflation, Gross Domestic Product, national income, unemployment, and economic growth.

Inflation

Marshall’s Theory of economics states that the law of demand and supply determines the output and price. The supply and demand are like a blade of scissors in determining price. The Theory was distinguished by new concepts such as consumer surplus and elasticity of demand which play an essential role in developing economics (Groenewegen, 2019). The supply and demand law established by Marshall Theory explains how the interaction between the buyers and sellers of a resource affects the price. Generally, when the prices increase, people demand less and supply more.

In the short term, the COVID-19 pandemic led to deflation, while in the long term, the pandemic led to inflation concerning the law of demand and supply. Deflation is considered the decrease in the general price of services and goods, while inflation increases the general prices of services and goods. The pandemic has led to changes in consumption patterns and de-globalization, linked to structural changes. In the short term, there has been a downward pressure such as reduced consumption due to lockdowns, low movements, and oil falling oil prices. The reduced consumption patterns led to reduced production and the closure of companies. The disruption from the pandemic led to reduced demand and supply, which led to deflation. The demand for certain sectors such as tourism and transportation experienced a low demand. The non-essential industries and workers were locked, leading to a reduced supply of products. The demand and supply shock led to constraints on the output. The weak monetary environment during the pandemic leads to low demand and supply. The falling prices led to companies slowing their production, which meant low supply.

Concerning the price of services and goods that make up inflation, consumption has remained weak and below due to the effect of the crisis on the labor market, limiting the inflationary pressure (Álvaro and Eduard, 2020). The saving rates have increased after the pandemic compared to the pre-crisis levels. The high uncertainty level surrounding the current settings influences the behavior of households and firms (Ha, Kose, and Ohnsorge, 2021). For instance, households with higher incomes are saving more due to uncertainty and precaution, which have lowered the inflationary pressure. Increased unemployment during the pandemic has led to reduced spending on non-essentials which persistently affects the demands.

COVID-19 has had effects on inflation that could lead to structural changes in the global economy. For instance, the crisis showed the fragility of the global supply chain, which was greatly vulnerable to the major shocks of the pandemic. This might lead companies to rethink their production’s geographical supply and distribution. Therefore, the pandemic led to a disinflationary effect on the short due to the behavior of businesses and consumers who may become more cautious on the investment decisions and consumption that might result in permanent changes.

The pandemic has led to inflation in the long term, especially due to the post-pandemic effects. Due to supply chain disruptions, base effects, and pent-up demand for services, inflation has increased. Almost a year after the sudden decline in demand, there have been inflation growth rates indicated by the consumer price index (Reinsdorf, 2020). For instance, the United States inflation rate rose to about 6.8 percent in 2021 (Works, 2021). This is because the consumer price index has increased with the prices increasing in different sectors such as housing, food, and gas. This has been detrimental to the economy, where the increase in prices for essential goods makes it harder for consumers to face high unemployment, and paychecks are not rising. The figure below shows the U.S. annual inflation, which clearly shows the long-term and short-term effects of the pandemic on inflation.

Gross Domestic Product

The national income entails the value of services and goods produced by a nation during financial years. Ideally, national income results from all economic activities in a country that are valued in terms of money. The national income can be determined through the Gross domestic product. The Gross Domestic Product relies on the monetary value of services and goods and is linked to inflation. The increasing prices will tend to increase the country’s GDP, but that does not necessarily translate to changes in the quality and quantity of services and goods produced. The GDP is the sum of personal consumption, business investment, and government spending. Considerably, the classical model of the economy offers a clear picture of the impact of the pandemic on the Gross Domestic Product of most countries.

The Classical model of economy argues that the economy is very free-flowing and that the wages and prices adjust to the ups and downs of demand with time (Michl and Foley, 2019). This means that when times are good, the prices and wages quickly go up, and when the time is bad, the prices and wages freely go down. Therefore, since the economy is self-regulated, the pandemic has caused price adjustment in goods and services, influencing the Gross Domestic Product. The weight of COVID-19 has caused many countries’ GDP.

Maliszewska et al. (2020) focused on the global impact of the pandemic on the GDP and found out that the GDP has fallen by 2 percent, with 2.5 percent in the developing countries and 1.8 percent in the developed nations. The decline has been linked to the underutilization of capital and labor, increased global trade costs, redirection of demand from non-essential goods and services, and a drop-in travel services. The figure below shows the decline in U.S. GDP due to the crisis caused by the pandemic.

Personal consumption is a major component of the GDP. COVID-19 has influenced personal consumption due to fears about the persistent and deep recession and a spike in job loss. The transactional level spending data for the United Kingdom indicated that consumer spending fell increasingly during the pandemic. This is because the high earners reduced their expenditure more than their income falls. According to a case study on the Republic of Kosovo on the impact of the pandemic on personal consumption, the findings indicated that it has impacted personal consumption and led to a shift from luxury consumption to essential products (Ziberi, Rexha, and Gashi, 2021). Similar patterns were found in Spain and United States.

The reduced business operations during the pandemic have reduced the rate of business investment. Most businesses have been temporarily closed due to economic losses such as reduced operations, low incomes, financial markets, and disrupted supply chains, impacting business investments and global trade. Interference with the global supply chain is one of the greatest effects of the pandemic on business investments. For instance, a list of companies in China and the United States have been forced to reduce their production, which is growing longer each day due to disruptions caused by the pandemic.

The Coronavirus pandemic led to increased financial pressure to many countries that required additional spending to mitigate the revenue’s social, economic, and health impacts despite the falling revenues. When the public expenditure is weak, the government expenditure is likely to be high. For instance, most nations in developing Asia have been left with a sharp contraction of fiscal revenue due to the pandemic. The serious negative influence of the pandemic has reduced the government income due to the economic and health fallout.

Taxes

The COVID-19 pandemic has greatly deteriorated public finances, adding to the long structural issues such as increasing inequality, climate change, aging population, and digitalization. The pandemic gas lowered the local and state revenues, which has led to a decline in income tax. The decline in income revenues has been linked to the closure of businesses and employment losses. Rising government spending and poor revenue performance have reduced income tax. Coronavirus pandemic has influenced sales activity and consumption and prolonged the inventory cycle, which has led to deferred tax payments and tax-related changes. The tax reliefs and deferred tax payments have lowered tax revenue during the pandemic.

Adam Smith focused on the issue of taxation concerning who needs to be taxed, how much, in what manner, and to what purpose. He argued that taxation needs to follow certainty, fairness, efficiency, and convenience as the principles of good taxation (Luigi, 2019). The tax in which an individual is bound to pay should not be arbitrary but certain. The manner of payment, time of payment, and the quantity to be paid need to be clear to every person. Concerning these principles, most countries have allowed deferred tax payments and offered tax relief during the pandemic to address the businesses and liquidity of households and support economic slowdown.

Approximately more than 105 countries have implemented tax relief to prevent economic fallout during the coronavirus crisis. The measures have fallen into different categories: payment deferral, deadline extension, rate reduction, and waiver (Perret and Van Dender, 2020). Countries such as China, Australia, Germany, the United States, the United Kingdom, Lebanon, Belgium, and Austria have allowed deferral of tax payments. For instance, Turkey offered the transportation and retail sectors a six months tax deferral (Simeon and Joanna, 2020).

Unemployment

Unemployment is a significant macroeconomic indicator for various reasons. The rate of unemployment speaks to how well the economy is operating. Unemployment means that the country is not using labor effectively, which results in less production of goods and services. Unemployment has remained a major cause for developing and developed nations due to its economic and financial impact. Low unemployment means lost productivity and a negative output gap. According to Keyne’s Theory of employment, the volume of employment in a nation depends on the level of effective demand for the services and goods (Peden, 2018). Therefore, the unemployment rate is linked to the lack of effective demand. The lower the level of output, the lower the volume of employment. To meet a certain demand for goods and services, people are employed to produce the goods and services for consumption.

During the COVID-19 pandemic, the unemployment rate has been high due to the low consumption of goods and services resulting from the containment measures. Non utilization of labor due to unemployment leads to loss of output and double maintenance costs. Unemployment negatively influences economic development since it wastes human resources, people can’t support their families and increases the economy and population. In April 2020, the unemployment rate jumped to the highest level not seen since in decades (Isaac, Paul, and Emma, 2020). Most of the jobs lost during the crisis were in industries that deal with non-essentials, those that pay low average wages, and medium wage industries.

The deterioration in the labor market corresponded to the different mandated stay-at-home and advisory orders implemented in response to the COVID-19 pandemic. The COVID-19 pandemic has had a significant impact on the labor market metrics for every economic sector, state, and major demographic group. The pandemic resulted in rapidly implemented exertions to limit contact among people and many shutdown orders. The figure below shows the changes in the rate of unemployment across states between February and June.

The employment rate in the U.K. has fallen from 76.3% to 75.5% (Foley, Francis-Devine, and Powell, 2020). There has been a fall in the rate of employment throughout 2020 since the start of the pandemic, with the levels going down to 32.11 million. The impact on unemployment has varied between age groups, with the highest percentage being the young people. This is because the young workers are more likely to work in occupations and industries with more job losses in the labor market. According to the International Labor Organization report on the consequences of the COVID-19, the youths have been more vulnerable within the workforce (Foley, Francis-Devine, and Powell, 2020). The current massive job losses have particularly pain effects on young individuals globally. The Covid-19 economic consequences might lead to the dislocation of the young individuals from the labor market for a while. The private sector has driven the largest rate of unemployment. The fall in employment for the older and young people has resulted in low economic activity during the pandemic. Structural unemployment has been on the rise due to the pandemic. Ideally, structure unemployment is the long-lasting unemployment that results from the long shifts in the economy. The structural variations have resulted in persistent labor market differences, which include the rates of unemployment.

Economic Growth

The Neoclassical growth theory of Solow and Swan states that economic growth is dependent on three major factors capital, labor, and technology (Foley, 2019). A steady economic growth results from the three economic forces. One of the major assumptions of this theory is that consumers within the economy are saving a constant proportion of their incomes as they consume the rest. In a strongly linked world, the impacts of the disease have gone beyond morbidity and mortality and have become apparent since the outbreak. The pandemic has been linked to economic shutdowns, which have led to slow economic growth.

The pandemic has led to low output per capita due to low economic activities. The pandemic is expected to lead most countries into recession in the coming years, with their per capita income contracting into the biggest fraction of nations globally (Deb et al., 2021). The pandemic has disrupted lives and daily operations, which have generated a global economic slowdown. Considerably, the pandemic caused a supply shock, demand shock, and financial shock all at once. These shocks resulted from unemployment, restriction of movement, quarantine, and business closures that led to a blow on consumer services. Social distancing and lockdowns lowered the capacity of the economy to produce services and goods. For instance, companies all over the world, irrespective of their size, began to feel contractions in production. The high percentage of job losses created a crisis for all workers, which wiped out the previous job growth. There has been a dramatic swing in retail sales and household spending, which have affected the cost of living.

The pandemic has severely affected the labor markets hurting the enterprise levels. The low sales volume and revenue in companies have affected the ability of various firms to retain labor. The pandemic has led to a drastic change in the use of technology, with most companies focusing on automation and artificial intelligence. The effect of the pandemic on socio-economic activities has created a lasting change in the use of technology which has influenced the rate of unemployment. Digital technology has created a new chapter of economic growth with new opportunities that are contributing to the survival of the economy. During the pandemic, the consumers have shifted their consumption patterns towards online channels that the industries and companies have responded to. The pandemic has accelerated the growth of the digital economy, with the technological processes continuously increasing productivity.

Conclusion

COVID-19 pandemic and the resulting measures such as lockdowns have created disruptions to both demand and supply in the global world. The pandemic has clear supply effects such as closed business, quarantines, supply chain disruptions, and diminished mobility that influence production. The changes in prices have indicated the changes that the pandemic has caused on demand. In the short term, countries have faced deflation, while in the long term, there have been high inflation rates due to increased demand for goods and services and increased prices. The GDP has declined by an average of 2 percent since the pandemic. Tax reliefs and government spending have reduced the tax revenues since the rate of consumption and production are low. The unemployment rate is still high since most people lost their jobs during the pandemic. The economic shut down due to reduced economic activities has slowed the economic growth rate. Therefore, the supply shocks, demand shocks, and financial shocks experienced during the COVID-19 pandemic have contributed to the global macroeconomic impacts.

References

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