Investments  

The economic implications of coronavirus

  • Explain the immediate impact of Coronavirus on economy
  • Explain what demand and supply shock mean
  • Identify measures government is looking to take to help economy
CPD
Approx.30min
The economic implications of coronavirus

When chancellor Rishi Sunak announced a rescue package for the UK economy as it battles the Coronavirus, he used the phrase “whatever it takes” to emphasise the extent of the measures he is willing to take to drag the economy out of the quagmire in which it currently finds itself.

This phrase was not simply an attempt at soaring rhetoric to reassure a worried population.

It was a deliberate attempt to echo Mario Draghi, former president of the European Central Bank (ECB), who used the same phrase in 2011 to describe the extent to which he would go to stop the collapse of the Eurozone economic area.

The Mr Sunak chose a phrase linked to the potential collapse of a core economic system which was designed to emphasise the extreme nature of the economic problem posed by the virus. 

While the Coronavirus pandemic is a problem on a different scale to the Eurozone debt crisis, what both events have in common, is that they are both supply side shocks to the economy and demand side shocks occurring at the same time; something which rarely happens in economics.

A supply side shock occurs when it becomes more difficult for goods to get to market, either because banks have stopped lending so companies are unable to finance their operations, while consumers are less able to access credit even if they have a suitable income.

The supply side shock happened initially when the Coronavirus was first discovered in China, and goods from that country could not be manufactured and exported to the UK and US, creating immediate shortages.

Demand and supply side shocks

This would normally be expected to lead to a dramatic increase in inflation, as fewer available goods causes prices to rise.  

But the spread of the virus to the rest of the world has resulted in this fear becoming irrelevant, as demand for all goods collapsed; first in Europe, then in the UK, as individuals were less able to get to shops to buy.

The next stage is that shops are unable to stay in businesses without customers, so are forced to cut jobs, delivering the second, and larger, demand side shock to the economy.  

Andy Haldane, chief economist of the Bank of England described Brexit as a supply side economic shock, because restrictions on the movement of people, goods and services reduces supply, pushes costs up and growth rates down.

But he noted that a demand shock didn’t happen in the UK economy in the immediate aftermath of the Brexit vote, as  consumers continued to spend, and he said it is for this reason the UK economy performed better in the immediate aftermath of the vote than the bank had predicted.