Global Economic Effects of COVID-19, Analysed by Dr Yasam Ayavefe

At the beginning of 2020, the coronavirus epidemic was limited to only China but quickly spread to the rest of the world. To stop this health crisis, many countries implemented containment measures. These caused an unprecedented economic crisis. The restrictions affected all areas of production, causing a worldwide demand shock.

Dr Yasam Ayavefe

Lockdowns Have Had a Huge Economic Effect

This resulted in an unprecedented decline in supply and demand. Progress towards growth has stalled. Covid-19 has caused a sharp deterioration in the labour market in many countries. Countries have taken many measures and offered credit facilities to support the public and ensure credit facility. The government has worked to reduce interest rates in banks and has contacted central banks.

We will start by taking a still partial inventory of the economic situation and the extent of the recession in the first quarter of 2020, based on statistical information on the situation in March.

These indicators should of course be interpreted with caution. Traditional statistical instruments, in particular, struggle to fully reflect the macroeconomic situation in the face of a shock.

Analysis of the transmission of shock between sectors of activity and different economies is carried out in the second step. Here, estimating the one-month closure shock makes it possible to calibrate the adjustment in the labour market.

Initial Data Released by National Accounts

At the end of April or mid-May, the National Statistical Institutes of Developed Countries published the first version of the first quarter accounts.

In the growth figures, it is possible to see the economic effects of the restrictions in the last two weeks of the quarter.

Among the industrialised countries that published the first results, the United States and the United Kingdom appear to be less affected than European countries. Among European countries, France, Italy and Spain showed the biggest decreases.

These inequalities observed in the impact of the pandemic on growth are primarily due to internal shocks to which economies are exposed.

They also depend on the sectoral composition of value-added and, in particular, the weight of market services affected by the quarantine. It can also be explained by the degree of openness of countries and the different exposures to shocks by their trading partners, as well as the weight of tourism (accommodation and catering) in the economy.

Finally, in the unprecedented context of the Covid-19 crisis, they may stem from problems in establishing national accounts and the way national statistical institutes are addressing the difficulties inherent in the situation.

Most statistical institutes point out that these results need to be revised. Past experience demonstrates the difficulty of measuring the impact of major shocks on economic activity.

By one measure of the past, revisions between the first version released during the great recession and the current version have almost always been on the downside.

The process of revising the accounts for the first quarter of 2020 also started one month after the preliminary versions were published.

All countries revised their accounts. Some went down, some went up. In any case, the process of reviewing these accounts is just the beginning.

Presentation of Indicators

Although the initial estimates of the national accounts were not precise, they were enhanced by the measures taken in the first quarter to curb the activities. Considering the multiplicity and difficulty of the measures, it is quite difficult to detail all the decisions taken.

Researchers from the University of Oxford and the Blavatnik School of Public have created an indicator that measures the rigour of government responses. This indicator has attempted to summarise the containment measures adopted in 163 countries according to two types of criteria.

First; the severity of the restriction for each listed measure (closure of schools, businesses, limitation of meetings, cancellation of public events, house arrest, closure of public transport, restriction of domestic and international travel), the second is the local or generalised nature of each measure in a country.

Among the measures; The two areas that have had the most impact on activity are noteworthy: the closure of schools (which prevents parents from working to care for their children if they are not working from home), and the closure of businesses and shops.

According to the methodology devised by the University of Oxford, the severity of measures is characterised on a conventional scale ranging from 0 (nonexistent measure) to 3 or 4 in their most restrictive applications.

Also, depending on whether a measure remains local to the economy or simply geographically, its impact on activity can be differentiated as a feature we consider.

From these indicators, we can evaluate the severity of quarantines by country in terms of the restriction imposed by closure measures and their generalisation.

After China's initial containment measures in January, Europe quickly became the epicentre of the pandemic, prompting countries to gradually adopt lockdown measures.

Italy was the first developed country to take such measures: very restrictive closures, limited locally to around 50,000 people from February the 22nd, were extended to the Lombardy and Veneto regions on March 8th and rolled out across the country from March the 10th.

Other European countries followed Italy to prevent the spread of the virus in the face of increasing hospital capacities. The severity of business closures in Germany remained low and implemented later than in other countries.

On the other hand, the closure of schools was implemented in two stages. The United States showed a soft stance with the absence of widespread measures in the first quarter, even as it led to the complete closure of schools and non-essential businesses. Among developed countries, only Sweden stands out for the lack of strong containment measures. As a result, the economy has been heavily affected by Covid-19.

Find out more about Dr. Ayavefe and his work here:

https://yasamayavefe.com/
https://milayacapital.com/
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