Pandemic, Recession, and Mitigation

PETER KNEFFEL/DPA VIA AP

A passenger wearing a face mask goes to the Lufthansa check-in counter at the Airport in Munich, Germany, Wednesday, March 18, 2020. For most people, the new coronavirus causes only mild or moderate symptoms, such as fever and cough. For some, especially older adults and people with existing health problems, it can cause more severe illness, including pneumonia.

Historian Yuval Hariri said in an interview with CNN that the present pandemic is the worst we have faced, at least in the last 100 years.No person, institution or country has had the experience of handling a pandemic of this magnitude. As a result, no reference is available for creating simulations, designing scenarios, and developing mitigation strategies. It has been difficult to run simulations, because there are still too many assumptions to date. The scale of infection is too broad, while the dynamics of the pandemic is still developing. The milestones of tragedy, as the World Health Organization (WHO) stated, has already been exceeded. The Covid-19 pandemic has caused a simultaneous humanitarian and economic crisis, one of the worst in the history of the modern world.

The main focus at present is the efforts to ensure safety and health amid the continuing impacts on the global economy. Three of the world’s manufacturing centers, China, Germany, and the US, have been exposed, threatening to paralyze the global supply chain.

China might fit this scenario after successfully overcoming its outbreak with a strict lockdown approach.

There are three general scenarios for recovering from the shock of the coronavirus pandemic. The first scenario is V-shaped, involving a pattern of sharp and rapid decline that is soon followed by equally rapid recovery. China might fit this scenario after successfully overcoming its outbreak with a strict lockdown approach.

Under the scenario of The Economist’s 2020 survey, if the Chinese outbreak ends in March, economic growth will be corrected to 5.4 percent. This projection certainly assumes the absence of a domino effect in the virus’ spread throughout the world. If the entire world experiences a public health emergency, it is also possible that China\'s growth will come under pressure again due to the ensuing global slowdown.

KOMPAS/YUNIADHI AGUNG

Passengers queue at a Transjakarta bus stop in Puri Beta, Tangerang, Banten, on Monday (16/3/2020).

The second scenario is U-shaped. This pattern is depicts a sharp decline followed by a relatively long economic slowdown, before gradual recovery.

The third scenario is L-shaped, a pattern of decline that is not followed by recovery. On observing the indications, several European countries could potentially experience this third scenario, especially Italy and possibly Germany.

The economic impact of the pandemic will generally be determined by two things: the scale [breadth] of the outbreak and how quickly governments are responding. The longer it takes to contain the outbreak and the wider the virus’ spread, the more severe the economic damage and the longer recovery will take. So, the way governments manage their localized outbreaks is the key determinant of economic recovery.

Global recession

It is too early to predict when the pandemic will end. However, it is not too early to conclude that a global recession will occur. At least, that is the opinion of Kenneth Rogoff, professor of economics from Harvard University. Unfortunately, this view makes sense in referring to the current indications, and a global recession is almost certain.

Economics professor Barry Eichengreen at the University of California, Berkeley who has studied the history of economic crises, has said that the current crisis is unprecedented.

Economics professor Barry Eichengreen at the University of California, Berkeley who has studied the history of economic crises, has said that the current crisis is unprecedented. First, the pandemic’s impact on the economy is unbeatable in terms of size and speed. Second, the turmoil is due to the two sides of production and consumption getting hit at once, which has paralyzed the economy.

To illustrate the impact of the pandemic on the global economy, Bloomberg (6/3/2020) has shown how it hit the Chinese economy: car sales fell 80 percent and passenger trips dropped 85 percent, while restaurants and retailers nearly stalled. Economic growth in the first quarter of 2020 will slow to just 1.2 percent.

KOMPAS/TOTOK WIJAYANTO

A Foodmart employee reviews a delivery order on WhatsApp (WA) on Friday (27/3/2020) at the grocery store’s Plaza Semanggi outlet in South Jakarta. Foodmart has introduced a new service, “Chat & Shop by WA”, to make it easier for customers to shop without leaving home, in line with the government\'s stay-at-home policy during the Covid-19 outbreak. The service is available to customers within a maximum 5 kilometers from a Foodmart store.

Bloomberg suggested four possible scenarios of the coronavirus pandemic. In the first scenario, the Covid-19 outbreak caused economic turmoil in China and then impacts the global economy. In the second scenario, the outbreak causes a prolonged slowdown in the Chinese economy to cause regional effects through Asia, including Japan and South Korea. In other words, China experiences a U-shaped pattern that then reduces global growth to 2.3 percent, revised down from 3.1 percent as originally projected.

In the third scenario, the outbreak does not hit just China and several of its major partners in Asia, but also hits Italy, France, and Germany. On the other hand however, it causes no significant pressure on the economies of the US, India, Britain, Brazil and Canada. If this situation occurs, global growth will drop to just 1.2 percent. Europe and Japan will experience recession while the US economy grows a mere 0.5 percent.

The fourth scenario assumes that all countries experience severe economic turmoil due to Covid-19, such as China did in the first quarter of 2020. If this scenario occurs, global growth reaches almost zero percent. The US, along with Europe and Japan, experience recession, and these three slowing economies will impact China again. In this scenario, the Chinese economy will grow just 3.5 percent, the lowest since Deng Xioping\'s reform era in the 1980s.

In this final scenario, the world will lose US$2.7 trillion in production, or the equivalent of the current British economy. Seeing how the situation is developing, with so many countries struggling to overcome the impacts of the Covid-19 pandemic, it is feared that the fourth scenario will occur.

AFP/JOHANNES EISELE

Traders work during the closing bell at the New York Stock Exchange (NYSE) on March 18, 2020 at Wall Street in New York City. - Wall Street stocks plunged again March 18, 2020 as the economic toll from the coronavirus mounts and economists warn of a deep recession.The Dow Jones Industrial Average tumbled 6.3 percent, or more than 1,300 points, to close the day at 19,903.50. The index sank by as much as 10 percent earlier in the session, which saw trading halted yet again.

Richard Baldwin and Beatrice Weder di Mauro has written the digital book, Economics in the Time of Covid-19. In his introduction, Baldwin explains the implications of the pandemic, not only for all economic sectors and double-hit to production and consumption, but also public confidence in the future of the economy. This is how shock and turmoil will cycle through through all economic lines. Recession will follow the pandemic. The more widespread that countries are affected and the longer that mitigation measures last, the recession will grow worse and recovery will not be easy.

Mitigiation efforts

How will the global scenario affect our economy? The first and second scenarios will correct Indonesia\'s economic growth by 0.3 percent. The third scenario will correct our growth by 2.8 percent, and as for the fourth scenario, growth will erode as much as 4.6 percent from the original projection. If this fourth scenario occurs, our economy will grow below 1 percent.

Risk mitigation usually considers two things: the magnitude and the likelihood of the impacts that are developing.

Referring to Rogoff\'s statement, it is very possible that the global economy will enter the fourth scenario and a full recession will occur.

Four scenarios have been described. The question is, how likely is the worst-case (fourth) scenario? Referring to Rogoff\'s statement, it is very possible that the global economy will enter the fourth scenario and a full recession will occur.

Learning from the experiences of many countries in the world, monetary policy has not helped much. In the US, even though the US Federal Reserve has lowered its prime interest rates (prime rates) to the 0-0.25 percent range, it has not been able to control the decline in indexes on major bourses like the Dow Jones and Wall Street. There are actually concerns that if monetary expansion is too aggressive, a bubble will form in financial markets.

The Financial Services Authority (OJK) issued a relaxation policy for calculating credit quality and delaying debt payments. By doing so, both banks and businesses can focus more on operational issues to ensure business sustainability. The biggest risks from this turmoil are rises in bad loans and business closures, which would hit the economy hard and increase unemployment.

The government has issued its first and second stimulus packages, to be followed by a third. The first package, worth around Rp 10 trillion, focused on providing stimulus for the tourism sector, including airline subsidies. The second package, which pursued fiscal relaxation and was worth Rp 22.9 trillion, included tax exemptions for certain sectors and companies (PPh 21 and 22), and reduced income tax (Article 25) by 30 percent for 19 sectors for a period of 6 months.

Pandemic mitigation

The first policy package needs to be reevaluated because it does not focus on the main issue, namely bringing the Covid-19 outbreak in Indonesia under control. Strict measures must be implemented to prevent transmission and cases must receive sufficient treatment. Moreover, the reductions to the direct incomes of those who are infected must be compensated immediately. The urgency of economic stimulus to mitigate the pandemic is very high, since the longer the measures are applied, the more severe the economic damage will be.

This global pandemic is offering important lessons in that economic policies need to be more victim-oriented – that is, strive for public safety and health. Only then will the sectoral stimulus be effective. The government needs to revise the first policy package because it does not side with the victims at all. The nationwide outbreak should be used as a valuable lesson to correct the economic policy.

The future

The Financial Times published Yuval Noah Harari: The World After Coronavirus (03/20/2020), which reviews historian Harari’s views of a post-pandemic world. The decisions both people and governments take over the next few weeks to deal with the coronavirus health crisis will determine the future of the world, not only in the health sector, but also in economy, politics and culture. In other words, the Covid-19 pandemic and the policy response will determine the future of civilization. In normal times, it is difficult to force people to accept policies to work and study at home or to conduct lectures fully online. Because of the coronavirus, even those generations who have had difficulty adapting to current technologies have been forced to learn and use it.

The use of technology in daily life is almost complete, even in areas that are difficult to enter during normal times. In order to monitor the movement of its population, China implemented a 24-hour monitoring system in all regions that involved a technological ecosystem that ranged from drones to the Internet of Things, to artificial intelligence and to big data. And it must be admitted that one of China\'s successes in controlling its outbreak was its ability to enforce quarantine on its people.

After the epidemic, the variety of good practices must be continued to improve the quality of life and civilization.

One of the daily implications of the pandemic is public awareness of health and hygiene standards. Under normal circumstances, it is difficult to educate the global public on diligent hand washing in a short time. As a result of Covid-19, personal hygiene habits have been adopted. Aside from its negative economic impacts, the pandemic must also be used as an opportunity for humanity to learn in terms of founding the civilization of the future. After the epidemic, the variety of good practices must be continued to improve the quality of life and civilization.

Therefore, it is unfortunate to witness the government\'s stance, which has tended to cover up the reality and attempted to minimize the problem through means that deny knowledge. Aside from eroding public trust, this stance will make us miss the opportunity to educate the public on better awareness and knowledge about not only health, but also solidarity and humanity. Harari is right: the pandemic will show our basic nature – the kind of human beings, governments, and people we really are.

A Prasetyantoko Rector, Atma Jaya Catholic University, Jakarta