BackContaining the infection in the economy
Strict social distancing measures imposed to flatten the infection curve, for instance, requires educational institutions and non-essential businesses to be shut or work at half capacity
PremiumAcross the world, countries are aiming to flatten the curve of covid-19 cases in order to tackle the coronavirus outbreak. Simply put, they are trying to slow down the virus’s spread so that fewer people need to seek treatment at any given time.
But this has a side effect. In the short run, flattening the infection curve inevitably steepens the economic recession curve, writes Pierre-Olivier Gourinchas of UC Berkeley. Strict social distancing measures imposed to flatten the infection curve, for instance, requires educational institutions and non-essential businesses to be shut or work at half capacity. This affects the productivity of the economy.
Gourinchas estimates that containment measures could reduce economic activity by 50% for one month and 25% for another month in the US economy. This could result in a GDP decline of about 6.5%.
This is the most optimistic scenario, according to Gourinchas. Much like individuals ignore self-isolation instructions, economic actors may make myopic decisions that could worsen the economic downturn, he argues. For instance, faced with future uncertainties, customers may cut spending,, making it difficult for firms to earn out of their existing inventories. This could result in more layoffs and rise in non-performing loans. Thus, the economy too faces a “flatten the curve" problem, he argues. Without intervention, the downturn will be deeper.
He suggests that central banks should provide additional liquidity to the financial sector. At the same time, it must be ensured that workers remain employed and get temporary layoff assistance, firms get tax concessions and credit breaks. He warns that timing is of utmost importance: Economic stimulus is needed while the economy is in lockdown mode. Delayed efforts would be more costly to the economy.
Also read: Flattening the pandemic and recession curves
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