economic recession during the covid pandemic and forecasting the recovery after covid

Analyzing the economic recession during Covid and forecasting the recession...22.1.. One year after the epidemic, theInternational Monetary Fund 2021 noted that the future of the world i

GROUP ASSIGNMENT ECONOMIC RECESSION DURING THE COVID PANDEMIC AND FORECASTING THE RECOVERY

AFTER COVID

Course: ECO121_IB1711 Lecturer: Tạ Thị Thắm

Group members:

1 Lê Nguyễn - SS170697

2 Huỳnh Minh Huy - SS170820

3 Trần Đặng Thủy Tiên - SS171132

4 Phan Thị Phương Thảo - SS171317

5 Nguyễn Hoàng Minh Tuấn - SS171157

6 Nguyễn Huỳnh Phương Trinh - SS170680

Table of Contents:

I INTRODUCTION 2

II Analyzing the economic recession during Covid and forecasting the recession 2

2.1 Using AS-AD Model to understand the effects of Covid on the price level and output 2

2.2 Forecasting the type of economic recovery after Covid 3

2.3 Government policies: Monetary & fiscal policy: Their importance, effectiveness, and future implications 9

III CONCLUSION 13

REFERENCES 14

The COVID-19 pandemic has had a significant impact on global production, consumption, exports, and other economic factors Therefore, it is essential to research how COVID-19 has affected the economies of specific nations One year after the epidemic, the International Monetary Fund (2021) noted that the future of the world is still quite uncertain The many pandemic-related disruptions and variations in policy support have led to differences in economic recovery rates between nations

Using macroeconomic theory about recessions and different types of recession, this paper aims to analyze the economic recession during Covid based on market indicators such

as GDP growth rate, unemployment rate, consumer spending, and savings and from that, measure future economic recovery

II Analyzing the economic recession during Covid and forecasting the recession

2.1 Using AS-AD Model to understand the effects of Covid on the price level and

output:

In the pandemic, the world has suffered from both a supply shock and a demand shock First, the massive lockdown of the economy represents a large negative demand shock

as consumers wish to buy less because of financial constraints Second, supply chains in several industries have been affected not only internationally because of the lockdown with another social distancing measure, with international trade in general greatly reduced, but also domestically, resulting in price increases for many goods and services

In macroeconomic theory, if both demand and supply decrease, consumers wish to buy less and firms wish to supply less, so the output (Q) will fall However, since consumers place a lower value on each unit, but producers are willing to supply each unit only at higher prices, the effect on price level will depend on the relative size of the two changes Taking the US as an example, it is reported that consumer price level has increased significantly, spiking 6.2 percent in the past year from 2020 to 2021, the highest inflation rate since 1990 during Covid, and reached an all-time high in June 2022 with inflation also rose to 5.3%

(this figure represents a decrease in both supply and demand side, however, the decrease in supply is larger than the decrease in demand)

Therefore, in this case, we can see that during Covid, while the output (Q) had decreased, the price level had been increasing significantly Therefore, supply shocks have been larger and more severe than consumer demand shocks This is because while consumers might cut back on unnecessary expenses (such as luxury goods, vacations, etc) but still have

to spend on essentials such as food and utilities, the lockdown and social distancing had caused many more manufacturers regardless of the industry, causing bigger Product shortages and supply disruptions

2.2 Forecasting the type of economic recovery after Covid:

Recessions are defined as "a considerable fall in economic activity distributed across the economy, lasting more than a few months, generally observable in real GDP, real income, employment, industrial production, and wholesale-retail sales" from a theoretical macroeconomic perspective [ CITATION Wor203 \l 1033 ] Both regular recessions and a coronavirus recession will eventually end since the economy will eventually reopen and resume growing

The graphs that appear when the gross domestic product (GDP) is plotted through time, from the start of the recession to its recovery, are named V, U, W, L, and K, and they represent some of the most typical forms of recession recoveries When examined more closely, recessions frequently fit into more than one category, depending on the industry or how various enterprises or demographic groups are impacted, for example

Figure 1 Different types of recessions

We can see that some industries were able to transition to remote work and function relatively normally following the COVID-19 economic shutdown in 2020, which resulted in

a recession whose official timing extended from February to April of that year (the shortest

on record) This allowed us to create a V shape However, those that couldn't, like the live entertainment industry, recovered considerably more slowly As a result, the final form of that recession may resemble a K, with various businesses turning around at various dates and rebounding at various rates

Figure 2 Evolution of financial performance indexes, January 2018–February 2021

Because of the parallels between the two recessions, we can predict how the economy will recover after COVID The Covid-19 crisis and the Great Recession both resulted from distinct shocks, but they also have some things in common Indeed, the financial situation did not worsen as much during the Covid-19 crisis as it did during the Great Recession, maybe as

a result of the monetary authority's prompt response [ CITATION For201 \l 1033 ] Additionally, although consumer and producer confidence declined, neither reached their lowest points in 2008, and the oil price was already falling before the pandemic shock However, there are several parallels to the financial crisis that may be seen First of all, both financial and epidemic failures were unprecedented, but there is a significant variation in the trigger for each [ CITATION Ten22 \l 1033 ] However, both shocks are of a massive size infrequently seen in recent history, suggesting the previously mentioned non-proportional and long-lasting effects Second, monetary policy has returned to the zero lower bound regime, meaning that additional stimulus will likely be less effective, signaling a slower recovery Finally, both recessions are significantly influenced by the uncertainty [ CITATION Eur20 \l

1033 ]

We would need to set up enough coronavirus testing so that people could safely return

to work without causing another rise in cases, as well as efficiently, treat current instances, for the COVID-19 recession to be V-shaped The economic impact must also be minimized through prompt government intervention to save employment and businesses as well as consumer assistance

There's a chance of a recession with a V form For instance, reports indicate that China has contained its COVID-19 outbreak, and the Chinese economy appears to be rapidly recovering To support consumers and businesses throughout the crisis, the U.S federal government was able to pass a stimulus package worth nearly $2 trillion [ CITATION OEC201 \l 1033 ] Some business leaders are optimistic about the likelihood of a V-shaped recession According to a survey, almost 38% of businesses predict that the recovery would

be V-shaped and that the economy will recover by the third quarter of 2020 [ CITATION Del20 \l 1033 ]

Figure 3 Adjusted forecasts of COVID recession and recovery

Economic growth after the economy's bottom was reached in the second quarter of

2020 has outperformed projections set at the start of the pandemic As a result, real GDP surpassed its pre-pandemic level in the second quarter of 2021 [ CITATION Eur20 \l 1033 ] Real GDP is on track to increase at a rapid rate of about 6 percent in 2021, supported by the continuing impacts of the fiscal stimulus passed by Congress in 2020 and 2021, pent-up consumer demand for in-person services, and the strength of labor markets, and asset prices Undoubtedly, that forecast is threatened by the Delta variation However, consumer spending and general economic activity were extraordinarily resilient, even in the early phases of the epidemic, when people had far less knowledge and mitigating tools [ CITATION Eur20 \l

1033 ]

The CBO's increased revisions to its predictions highlight the surprising strength in GDP and the increases in expectations (shown in figure 1) The GDP level in the third quarter

of 2020 was 4.8 percent higher than expected Additionally, since July 2020, CBO has increased its anticipated GDP for 2023 by almost 7%, bringing it up to a level that is presently 2% higher than its pre-pandemic prediction [ CITATION Bro21 \l 1033 ] Nevertheless, it is anticipated that until 2023, there will be a cumulative real production shortfall of around $400 billion in 2012 dollars compared to a pre-pandemic prediction More abrupt and unpleasant than those forecasts suggest, the downturn might occur

Figure 4 Revisions to CBO’s Economic Projections since January 2020

We can observe that the COVID-19 dilemma is best symbolized by the letter V in the labor market Due to the size of the disaster and the speed at which it occurred, the first decline in the number of people registered with Social Security was unprecedented About 40% of the 22 million jobs lost between February and April 2020 came from employment reductions in the leisure and hospitality sectors However, the rate of recuperation has been incredibly quick On the other hand, since then, a modest rebound in that industry has supported employment growth The average monthly increase in employment from February through July of 2020 was above 700,000 [ CITATION OEC201 \l 1033 ]

It has been demonstrated that consumer spending is strong for durable goods but weak for consumer services, which is a stark contrast to other recoveries Together, societal alienation and significant household support caused a rise in durable goods expenditure even

as households reduced spending on services—a striking deviation from the way people behave during more normal recessions [ CITATION CEP20 \l 1033 ] The overall real spending on goods fell 13 percent from February to April of 2020, as shown in figure 9a, but swiftly rebounded and had surpassed its pre-pandemic level by June As individuals start returning to their regular activities, demand has started to move back toward services in recent months Therefore, it can be predicted that the recovery in consumer spending will also likely be a V - shape

Figure 5 Percent change in Employment from Business Cycle Peaks, 1980 - 2021

Figure 6 Percent change in Real Personal Consumption Expenditure from

Business Cycle Peaks, 1990 - 2021

Finally, household savings and post-pandemic income after taxes and transfers from the government have both exceeded recent trends In 2020 and thus far in 2021, disposable personal income (DPI) increased more than it would have if it had grown at the same pace as the preceding five years' trend Since the beginning of the pandemic, DPI has overall been

$1.4 trillion higher than the trend [ CITATION CEP20 \l 1033 ] The total amount of household savings has significantly increased as a result of the pandemic's considerable increases in DPI and constrained services consumption Those resources will contribute to funding the unmet need for canceled out expenses In the end, households will see a rise in

wealth and savings as financial resources In the end, people will see the rise in wealth and savings as financial resources to support relatively consistent, long-term consumer expenditure

Figure 7 Change in Household Disposable Personal Income Relative to 2014 -2019 Trend

However, there is a lot of ambiguity surrounding the predictions Particularly, vaccine hesitancy, the sluggish vaccination of children 12 and younger, and the reappearance of the pandemic caused by the Delta variety appear to have slowed the increase in consumer demand and employment According to recent statistics, the most recent COVID-19 wave may be diminishing [ CITATION Ten22 \l 1033 ] However, the economic recovery would be considerably slower if the Delta variant—or any that replaces it—continues to influence consumer behavior and supplier networks 54 percent of businesses think a U-shaped recession is likely [ CITATION Del20 \l 1033 ] There are a few possible causes for this First and foremost, it might put off the time when states and regions can start reopening their economy if it takes longer to bring the spike in coronavirus cases under control Additionally,

if many companies fail or are otherwise unable to reopen during the economic downturn, there will be less employment available when the stay-at-home orders cease, further disrupting the economy Finally, customers might not be prepared to start purchasing when business resumes, particularly if they are still afraid to leave the house or get little financial aid

effectiveness, and future implications:

This economic shock has emphasized the need for fiscal and monetary assistance to be transformed to achieve a more equitable society This transition can be aided in three ways: In

a post-pandemic world, policymakers must address inequities within and among nations, as well as create progressive, efficient, and fair taxation arrangements Most crucially, policymakers must reconsider the responsibilities and boundaries between fiscal and monetary policy [ CITATION Far02 \l 1033 ]

Governments may adjust aggregate demand using two methods: fiscal policy and monetary policy, according to macroeconomic theory Government expenditure on finished goods and services, or tax policy, are both examples of fiscal policy When an economy experiences a recession, governments typically respond by raising government spending or lowering taxes Taxes can automatically sustain a market

Figure 8: Expansionary Fiscal Policy Figure 9: Expansionary Monetary Policy

A government with some power over the currency supply can also influence AD through monetary policy When a central bank raises the amount of money in circulation, the money generated becomes income for individuals and businesses, resulting in greater consumer and investment expenditure [ CITATION Kru07 \l 1033 ]

It has been reported that governments all over the world have used fiscal and monetary policy, but the effects of these policies are still being contested Policymakers used

a variety of fiscal, monetary, and regulatory policies Salary subsidies, release from contractual commitments and debt, and conditional cash transfers were all used by several