Coronavirus and the Economy

posted in: Economics | 0

Small Businesses

The Small Business Administration has given $520 billion in Personal Payback Protection (PPP) loans to help 5 million businesses cover 8 weeks of payroll costs. The program does not provide small businesses enough relief, with most of it is stipulated for covering payroll costs.

PPP loans have run out and many businesses (especially minority-owned businesses) lack the reserves and personal funds to survive. Small businesses account for 44% of economic activity so continued closures will lead to less liquidity, more debt, and higher unemployment.

In the coming months ahead, we can expect many more small businesses to close especially in the hardest hit retail sector and restaurant businesses. Unless PPP loan programs are extended and more is done to fight the pandemic, we could be talking about closures in the hundreds of thousands by 2021.

Corporations

27 percent of the Business Roundtable CEOs said their companies would not fully recover from the effects of COVID-19 until after 2021. The pandemic has hurt expectations on hiring, capital investment, and sales. Large corporations have already increased spending on workplace cleaning, have expanded their health programs for employees, and 95% have implemented flexible work options including teleworking.

Large corporations are in relatively better positions to weather the pandemic, as remote working and social distancing more likely. Moreover, companies like Amazona and Walmart will be able to shoulder the costs of implementing social distancing and cleaning procedures that could destroy small businesses.

Consumption

Consumption has mostly fallen as a result of the pandemic. The consumption of vehicles and parts, recreation, food services, and accommodation and transportation sectors have fallen by over 30%. Food and beverages is the only sector that has experienced growth.

In contrast to the other sectors of the economy, food and beverage consumption increased by 25% as a result of the switch by individuals from eating at restaurants and other commercial foodservice establishments to preparing and eating food at home. Consumption will be correlated with how well the U.S. controls the outbreak. Given current failures, it is unlikely that consumption returns to pre COVID-19 levels any time soon.

Trade

In the long run, COVID-19 has threatened to inflame tensions in bilateral and multilateral trade relationships, most notably between the U.S. and China. If the U.S. resumes its trade war with China when the first wave of the pandemic subsides, it could further exacerbate a global recession.

This could negatively affect consumption and net exports through increased production costs and higher consumer prices. Increased production costs would decrease incentives to export goods, while the burden of higher-priced imports would be passed on to consumers who could respond by reducing consumption.

Final Word

COVID-19 will have effects on all sectors of the economy, being most pronounced in the small business and trade sectors. The combination of poor government assistance and reliance on foot traffic has pushed small businesses to the brink of closure, a trend likely to continue to 2021.

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