Expectations, uncertainty and impact of COVID-19 on economic growth
By Dr. Abey P. Philip
While the world is still seething under the unpredictable waves of COVID-19, we are also seeing changes in the way we conduct our daily lives. In fact, the science of pandemics suggest that the virus is going to remain among us for a long time yet, similar to other viral diseases like SARS and HIV. It would be fair to assume that, unless a vaccine is found or an effective drug is identified or made, the outbreaks and spread of the pandemic will be a constantly evolving storyline.
Frequent lockdowns and curfews are inevitable at this point all over the world. We have also seen the rise of unlikely heroes – the medical staff, the cleaning workers, retail personnel and delivery riders working tirelessly to ensure our safety and smooth functioning of our economy. It is not to be noted that most of these people are the lowest paid workers in the market economy.
The global pandemic has highlighted the aberrant features of the capitalist system and revealed the unfair and inefficient economic strategies that render ordinary citizens weaker and more insecure whilst the ultra-rich take the opportunity to exploit the crisis. Billionaires in the United States – Bezos, Zuckerberg, etc. – became richer by US$434 billion during the pandemic.
We should not forget that these billions came from around the world, not only from the United States alone. The pandemic, of all the issues in the world, displayed the vulnerabilities of capitalism. On the brighter side, it has also revealed that a vision of a different world less reliant on the demands of capitalism is, after all, conceivable, but it needs a nourishing system that values human beings above the selfish interests of the market economy. It may be the right time for a reorganisation of the global economy to one that is self-sufficient with a touch of humanity.
To date, 218 countries and territories around the world have reported some 68 million confirmed cases of COVID-19, including Malaysia with over 75,000 cases and 388 deaths owing to the pandemic. Most of these countries have shut down almost all their economic activities to control the spread of the coronavirus. The pandemic has culminated in the highest number of shutdowns or lockdowns in the world around the same period and the global economic activity has been disrupted.
Almost all the countries in the world are forecasting economic contraction and a possible recession due to the reduction of economic activities during the pandemic. Malaysia announced an economic stimulus package worth RM250 billion (US$58 billion) on 27 March to boost its economy and prevent the country from sliding into a recession. It is important that the stimulus is allocated efficiently to gain maximum efficacy so that it would not become a huge burden in future for the citizens.
The Keynesian theory of economics asserts that governmental intervention can stabilise the economy with stimulus packages. The impact of government expenditure on economic production is evaluated using a fiscal spending multiplier and the economy can move to the potential level of production, but the effectiveness of all these depends on consumer and business confidence.
Consumer/business confidence is a measure of consumers’ level of optimism about the present and future state of the economy and their personal financial conditions, and many researchers believe it can predict future consumer spending patterns in the economy.
Higher consumer confidence may lead to fewer people saving, which could indicate a higher propensity to consume, which in turn means that consumers and investors have started to spend more.
An increase in government spending directly increases investment, thereby impacting the expectations of businesses regarding investment decisions in the economy, which in turn provides a further boost of investment. However, in unique situations such as the pandemic, if stimulus packages are not well-orchestrated, the opposite could happen and the burden of the stimulus packages could fall on middle class families, Such an impact would cause some M40 families to move into the B40 bracket.
Keeping this in mind, the federal and state governments need to create a positive economic confidence level among consumers and investors. If there is a lack of confidence in the future, the stimulus might miss the mark.
It is obvious that the pandemic exhausted not only households but also businesses. We need to assume that job-seeking is going to be difficult after the movement control phase because investors might be worried about the uncertainty and consumer confidence will be low, prompting the businesses to cut back on costs.
The government can ensure that the money reaches low- and middle-income families as they would be most affected by the pandemic and would most possibly be spending that money in the economy. Measures should be in place to guarantee that the stimulus money is not diverted to cover bad debt and effectively monitoring the transparency of the stimulus packages is inevitable. Confidence and economic growth will remain sluggish unless we diligently make sure that the stimulus packages are going to the right people at the right time.
It is also expected that this pandemic will be a supply shock leading to reduction in output and a surge in inflation. It is further expected that stimulus packages will lead to a further surge in inflation if they are working well. If they do not, then it will lead to further reduction in output and inflation.
This can lead to undesirable outcomes such as unemployment and a high level of uncertainty in the economy. It is imperative that the government not only stimulate the economy but keep people employed. It is especially important that small and middle size businesses get the support without slipovers in the process of transferring the stimulus packages.
Small and middle size business usually lack credit facilities and a low level of saving makes them prone to quick layoffs. It is the responsibility of the policy makers, politicians and government officials to make them feel valued and improve their level of confidence in the economy, pandemic or not. This can be realised through easy access to the existing loan facilities to invest again. The government can urge that one of the criteria for such loans is job creation.
Dr. Abey P. Philip is a senior lecturer in economics in the Department of Finance and Banking at Curtin Malaysia’s Faculty of Business. He has had 12 years of teaching experience with Curtin Malaysia and was Head of the Department of Finance and from 2010 to 2014. Dr. Abey’s passion for teaching has earned him many accolades, including Fellow of The Higher Education Academy (HEA) 2020; Curtin Malaysia Students’ Choice Award (Overall Best Lecturer) 2015, 2016 & 2017; Curtin Malaysia Students’ Choice Award (Best Lecturer in Finance & Banking) 2013, 2015, 2016 & 2017; Teacher of The Year Award from the Curtin Business School, Perth 2016; Curtin University Excellence in Teaching Award 2015; and Curtin Malaysia Excellence and Innovation Award 2015.