What We Think

April 10, 2020

The economic woes of coronavirus

Being a living structure, an economy is always affected by events that occur. The coronavirus is no exception and it is bound to impact local and global economies alike. As the WHO increased its status to a pandemic, the economic effects can no longer assumed to be negligible or contained but we are facing a severe threat to an already fragile global economy.

From an economic point of view, a pandemic of the scale of coronavirus is bound to impinge on both the supply and demand side of an economy as well as on confidence and decision-making.

The supply-side of economics looks at the production capacity of an economy. In this case, we have seen that various shutdowns and lockdowns which halted factories and businesses are disrupting global supply chains. This means that we can face shortages of certain goods and a slower provision in services. As a result, such firms will demand less labour with the end result of lowering spending power too. On the other hand, the demand-side of the economy looks into the spending patterns as well as the demand for goods and services. As we have seen from supermarkets there currently is a surge in demand for necessities which in turn their supply might be affected due to the disruptions in supply chains mentioned earlier. Also, given the restrictions that are being implemented and the actual fear of the pandemic, travel is being curtailed and this will have an effect on the tourism and hospitality sectors. All these factors together are impacting both consumer and investor confidence and will lead to postponing of investment decisions too which will further add to the depressing effects on the economy. The free-fall in stock markets across the world evidences this decline in confidence levels. This cycle can trigger an economic recession and most growth forecasts have already been downscaled further due to this risk.

It is for this reason that governments need to design targeted and temporary support and stimulus packages to mitigate the expected impact. Countries such as Malta, with a significant financial buffer, should be able to support impacted businesses. In fact, the Government has already announced that it will be launching such packages and the local Banks have already launched a number of initiatives in this regard.

Such unexpected events underscore the importance of having strong economic fundamentals, including public finances, in order to sustain such extraordinary expenditure. Unfortunately, countries like Italy which need to invest heavily due to the pandemic will have to address its rising deficits and debts after the crisis passes.

From an economic point of view, the most important thing at this point in time is controlling the spread of the virus as otherwise the impact will also grow exponentially. It is therefore important for governments to be proactive and take all needed measures including lockdowns. The short-term loss will minimize the longer-term impacts from a medical, social and economic point of view as the case of Hong-Kong strongly shows.

For further information on the above kindly contact:

JP Fabri

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