The economic implications of coronavirus

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. 

GDP has effectively stopped, which is something that no one who is alive today has ever seen.--Peter Toogood

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 UK market reaction has been lacklustre as investors don’t want the economic impact of Coronavirus deferred by interest free loans but want to see direct stimulus via helicopter money.--Edward Park

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.