How the Covid-19 Crisis is Causing a Demand-driven Recession

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Hira Aziz

How the Covid-19 Crisis is Causing a Demand-driven Recession

The Covid-19 pandemic initially brought a health challenge for the world and has become a health crisis for countries with a weak health management system. With the largest death rates since previous endemics, COVID-19 has created panic in the world. As a result, it does not only create the health crisis, but it also hit the global economy badly which is expected to lead to the deepest recession in decades. Emerging markets and developing economies as well as advanced economies are facing a steep recession. According to a World Bank report "Global Economic Prospects," the baseline forecast of the GDP of the global economy is a sharp decline of 5.2% in 2020. Beyond that, it is very hard to predict the exact amount of human and economic loss from this novel coronavirus, because of the uncertainty on how things will evolve.

Amongst all this misery, it's interesting to at least understand why the COVID-19 recession is fundamentally causing a demand-driven recession. According to Keynesian economists, the basic driving force of economic activity is the demand for goods and services. Insufficiency or decline in demand generates unemployment. The elements that build the aggregate demand are:
- Consumption of goods and services (by consumers and businesses);
- Investment in capital goods (by businesses, industry);
- Spending on public goods and services (by governments); and
- Net exports.

In order to prevent the spread of the virus, countries have imposed strict restrictions on the travel and tourism industry in the first phase.
As a result, travel companies were unable to generate normal revenues. They had to cut down their expenses and lay off the employees. But this increases unemployment, a decline in spending, a negative trend in stock market, and disruption for the trade industry.
Later the great global lockdown multiplied this decline in demand of employees, consequently leading to an even larger decline in the demand for goods and services. This is now causing a demand-driven recession. This is due to the negative multiplier effect that happens when there is a large decline in the aggregate demand that worsens the condition of the economy.
You can now witness various global economic institutions and countries that are working hard to keep up demand by pumping plenty of money to the economy.

Erin Duffin, "Impact of the Coronavirus Pandemic on the Global Economy" - Statistics & Facts, Jun 4, 2020, Statista.
Report: "Global Economic Prospects", by World Bank, June 2020.

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