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 DURINGTHE COVID PANDEMIC ANDFORECASTING THE RECOVERY

AFTER COVID

Course: ECO121_IB1711Lecturer: Tạ Thị Thắm

Group members:

1 Lê Nguyễn - SS1706972 Huỳnh Minh Huy - SS1708203 Trần Đặng Thủy Tiên - SS1711324 Phan Thị Phương Thảo - SS1713175 Nguyễn Hoàng Minh Tuấn - SS1711576 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 howCOVID-19 has affected the economies of specific nations One year after the epidemic, theInternational 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 todifferences in economic recovery rates between nations.

Using macroeconomic theory about recessions and different types of recession, thispaper aims to analyze the economic recession during Covid based on market indicators suchas 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 demandshock First, the massive lockdown of the economy represents a large negative demand shockas consumers wish to buy less because of financial constraints Second, supply chains inseveral industries have been affected not only internationally because of the lockdown withanother social distancing measure, with international trade in general greatly reduced, butalso domestically, resulting in price increases for many goods and services.

In macroeconomic theory, if both demand and supply decrease, consumers wish tobuy less and firms wish to supply less, so the output (Q) will fall However, since consumersplace a lower value on each unit, but producers are willing to supply each unit only at higherprices, 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 increasedsignificantly, spiking 6.2 percent in the past year from 2020 to 2021, the highest inflation ratesince 1990 during Covid, and reached an all-time high in June 2022 with inflation also rose to5.3%

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

Therefore, in this case, we can see that during Covid, while the output (Q) haddecreased, the price level had been increasing significantly Therefore, supply shocks havebeen larger and more severe than consumer demand shocks This is because while consumersmight cut back on unnecessary expenses (such as luxury goods, vacations, etc) but still haveto spend on essentials such as food and utilities, the lockdown and social distancing hadcaused many more manufacturers regardless of the industry, causing bigger Product shortagesand supply disruptions

2.2 Forecasting the type of economic recovery after Covid:

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

The graphs that appear when the gross domestic product (GDP) is plotted throughtime, from the start of the recession to its recovery, are named V, U, W, L, and K, and theyrepresent some of the most typical forms of recession recoveries When examined moreclosely, recessions frequently fit into more than one category, depending on the industry orhow 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 functionrelatively normally following the COVID-19 economic shutdown in 2020, which resulted ina recession whose official timing extended from February to April of that year (the shorteston record) This allowed us to create a V shape However, those that couldn't, like the liveentertainment industry, recovered considerably more slowly As a result, the final form of thatrecession may resemble a K, with various businesses turning around at various dates andrebounding 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 economywill recover after COVID The Covid-19 crisis and the Great Recession both resulted fromdistinct shocks, but they also have some things in common Indeed, the financial situation didnot worsen as much during the Covid-19 crisis as it did during the Great Recession, maybe asa result of the monetary authority's prompt response [ CITATION For201 \l 1033 ].Additionally, although consumer and producer confidence declined, neither reached theirlowest 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, bothfinancial and epidemic failures were unprecedented, but there is a significant variation in thetrigger for each [ CITATION Ten22 \l 1033 ] However, both shocks are of a massive sizeinfrequently seen in recent history, suggesting the previously mentioned non-proportional andlong-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 \l1033 ].

We would need to set up enough coronavirus testing so that people could safely returnto 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 minimizedthrough prompt government intervention to save employment and businesses as well asconsumer assistance.

There's a chance of a recession with a V form For instance, reports indicate thatChina has contained its COVID-19 outbreak, and the Chinese economy appears to be rapidlyrecovering To support consumers and businesses throughout the crisis, the U.S federalgovernment was able to pass a stimulus package worth nearly $2 trillion [ CITATIONOEC201 \l 1033 ] Some business leaders are optimistic about the likelihood of a V-shapedrecession According to a survey, almost 38% of businesses predict that the recovery wouldbe V-shaped and that the economy will recover by the third quarter of 2020 [ CITATIONDel20 \l 1033 ].

Figure 3 Adjusted forecasts of COVID recession and recovery

Economic growth after the economy's bottom was reached in the second quarter of2020 has outperformed projections set at the start of the pandemic As a result, real GDPsurpassed 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 thecontinuing impacts of the fiscal stimulus passed by Congress in 2020 and 2021, pent-upconsumer 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 spendingand general economic activity were extraordinarily resilient, even in the early phases of theepidemic, when people had far less knowledge and mitigating tools [ CITATION Eur20 \l1033 ].

The CBO's increased revisions to its predictions highlight the surprising strength inGDP and the increases in expectations (shown in figure 1) The GDP level in the third quarterof 2020 was 4.8 percent higher than expected Additionally, since July 2020, CBO hasincreased its anticipated GDP for 2023 by almost 7%, bringing it up to a level that ispresently 2% higher than its pre-pandemic prediction [ CITATION Bro21 \l 1033 ].Nevertheless, it is anticipated that until 2023, there will be a cumulative real productionshortfall of around $400 billion in 2012 dollars compared to a pre-pandemic prediction Moreabrupt 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 thelabor market Due to the size of the disaster and the speed at which it occurred, the firstdecline in the number of people registered with Social Security was unprecedented About40% of the 22 million jobs lost between February and April 2020 came from employmentreductions in the leisure and hospitality sectors However, the rate of recuperation has beenincredibly quick On the other hand, since then, a modest rebound in that industry hassupported employment growth The average monthly increase in employment from Februarythrough July of 2020 was above 700,000 [ CITATION OEC201 \l 1033 ].

It has been demonstrated that consumer spending is strong for durable goods but weakfor consumer services, which is a stark contrast to other recoveries Together, societalalienation and significant household support caused a rise in durable goods expenditure evenas households reduced spending on services—a striking deviation from the way peoplebehave during more normal recessions [ CITATION CEP20 \l 1033 ] The overall realspending on goods fell 13 percent from February to April of 2020, as shown in figure 9a, butswiftly rebounded and had surpassed its pre-pandemic level by June As individuals startreturning to their regular activities, demand has started to move back toward services inrecent months Therefore, it can be predicted that the recovery in consumer spending will alsolikely 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 fromBusiness Cycle Peaks, 1990 - 2021

Finally, household savings and post-pandemic income after taxes and transfers fromthe government have both exceeded recent trends In 2020 and thus far in 2021, disposablepersonal income (DPI) increased more than it would have if it had grown at the same pace asthe 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 ofhousehold savings has significantly increased as a result of the pandemic's considerableincreases in DPI and constrained services consumption Those resources will contribute tofunding 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 andsavings as financial resources to support relatively consistent, long-term consumerexpenditure

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

However, there is a lot of ambiguity surrounding the predictions Particularly, vaccinehesitancy, the sluggish vaccination of children 12 and younger, and the reappearance of thepandemic caused by the Delta variety appear to have slowed the increase in consumerdemand and employment According to recent statistics, the most recent COVID-19 wavemay be diminishing [ CITATION Ten22 \l 1033 ] However, the economic recovery would beconsiderably slower if the Delta variant—or any that replaces it—continues to influenceconsumer behavior and supplier networks 54 percent of businesses think a U-shapedrecession is likely [ CITATION Del20 \l 1033 ] There are a few possible causes for this Firstand foremost, it might put off the time when states and regions can start reopening theireconomy 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, furtherdisrupting the economy Finally, customers might not be prepared to start purchasing whenbusiness resumes, particularly if they are still afraid to leave the house or get little financialaid.

effectiveness, and future implications:

This economic shock has emphasized the need for fiscal and monetary assistance to betransformed to achieve a more equitable society This transition can be aided in three ways: Ina post-pandemic world, policymakers must address inequities within and among nations, aswell as create progressive, efficient, and fair taxation arrangements Most crucially,policymakers must reconsider the responsibilities and boundaries between fiscal andmonetary policy [ CITATION Far02 \l 1033 ].

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

Figure 8: Expansionary Fiscal Policy Figure 9: Expansionary Monetary PolicyA government with some power over the currency supply can also influence ADthrough monetary policy When a central bank raises the amount of money in circulation, themoney generated becomes income for individuals and businesses, resulting in greaterconsumer and investment expenditure [ CITATION Kru07 \l 1033 ]

It has been reported that governments all over the world have used fiscal andmonetary policy, but the effects of these policies are still being contested Policymakers useda variety of fiscal, monetary, and regulatory policies Salary subsidies, release fromcontractual commitments and debt, and conditional cash transfers were all used by several