As the world faces up to the biggest global health crisis of a generation in COVID-19 the eyes of the world have been on hospitals and intensive care wards. Simultaneously, this pandemic is bringing another crisis to the fore – an economic crisis. Whilst nations battle with health policy to control the virus, an economic battle begins. A reduced population damages GDP and the economy as workers are off work, lockdowns, until now a popular measure for restricting the viruses spread, close hughes swathes of the economy completely, and treasury expenditure skyrockets as the government assumes responsibility for paying the wages of workers in industries that the virus has impacted.
When the virus struck back in March, both the health response and the economic response were urgent and instant – and rushed. An Austrian School ideology was abandoned as governments sought damage limitation in the health of their citizens. Yet as the pandemic stretches on, the economic consequences of the pandemic, and government responses to it, are dragging on. This article will explore the biggest negative economic consequences of the pandemic – and how recovery might be driven by an Austrian approach.
A Global Crisis
It must first be emphasized that this is indeed a global economic crisis. The spread of COVID-19 across the earth has been far from uniform and many countries have experienced only moderate impact on health services as the well-being of their citizens. However, these countries – primarily in Africa – have not escaped the economic impact of the global pandemic.
Countries with vulnerable economies are entering recession all over the world – the first significant economic consequence of the pandemic is that this crisis is truly global.
A GDP Contraction
The crisis of COVID-19 is causing a global contraction in GDP with the Global Economic Prospects report forecasting a 5.2% contraction in global GDP. This means we’re seeing the biggest global recession in decades, and this reduction dwarfs the financial crisis of 2008. By quashing growth in 2020, economies will be set back for years to come. Along with the reduction in GDP comes its corollary – a reduction in per capita income not seen on this side of the 20th century. Economies in Western Europe and North America are expected to shrink by up to 7% over 2020.
The dual process of contracting economies and changed lifestyles have had a profound impact on supply chains and demand in certain sectors. Exporting in energy and manufacturing commodities have rapidly dropped as these industries have been the hardest hit. Sudden shifts in lifestyle – such as working from home – have impacted demand for fuel and this has resulted in a crash in the demand for oil. Oil prices are, thus, collapsing and the economic consequences of this strong market struggling are ongoing.
Manufacturing And Trade
Manufacturing industries were heavily hit by the pandemic and global trends in trade mirrored the decline in production output. Certain industries were hit worse than others and Unido estimates that production fell up to 94% in certain areas such as vehicle manufacturing. Even industries such as pharma, where investment remained strong, saw manufacturing fall by around half.
Simultaneously, a low level of trade in goods between nations emerged. Whilst certain countries such as China reacted quickly and strengthened trade, European, African and American nations suffered from reduced trade, dampening their ability to recover from the crisis.
The Road To Recovery
As most Western governments are still struggling to contain the pandemic on health grounds, a reckoning with the economic consequences is yet to come. Governments need to be clear that there are roads out of this crisis, but also many pitfalls along the way. Increased deficits can be tackled by either taxation or spending cuts – an Austrian model must be followed which prioritises cutting spending. If advanced taxation is pursued, liberty will be impacted as well as economic growth being slowed. Faith in the free market will allow energy and manufacturing sectors to recover and oil prices will return to the norm.
A Long Road Ahead
As we have seen, the economic consequences of the global COVID pandemic have been far reaching. Nations are entering 2021 with vastly oversized deficits, increased borrowing and little sign for slowing down. Whole economies are being redrawn based around viable jobs. It’s vital that governments recognize that in the response to the pandemic their haste has damaged the economy further. If attempts to return to economic normalcy in national deficits are driven by an approach placing an emphasis on taxation, the crisis will lengthen. Now more than ever governments and nations need to draw on the ideas of the Austrian School to overcome this crisis.
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