A London Business School (LBS) report says that if economic activities drop 50% for a month and 25% in the following two months, then world gross domestic product (GDP) could shrink by almost 10%.
Salient features of the report
- Direct effects of lockdown: If the lockdowns last longer, the actual costs, without policy interventions, could exceed 15% of GDP, they believe.
- This will largely be because of the direct impact of people sitting at home and not consuming goods and services as they would have had there been no lockdown.
- The indirect effects:
- Drop-in consumption, causing business and cash flows to dry up for corporates.
- This will trigger bankruptcies; hence, firms will fire employees, pushing up unemployment.
- A rise in joblessness will lead to those employed fearing they might become unemployed. The fear of unemployment leads people to postpone consumption.
- The vicious cycle of unemployment and a drop in consumption
- One of the first and strongest response of households with high marginal propensity to consume is to postpone vehicle purchases
- Some people postpone buying a car or other major consumer items, which may lead to loss of jobs in car making industries. It further leads to more postponement, which may lead to a second round of jobs loss.
- For example, Chinese vehicle sales in February, which fell 79.1% to 310,000 units.
- Sectors which will do good: In such uncertain times, people focus on buying everyday items. Sectors such as pharmaceuticals and fast-moving consumer goods are thus expected to do well.
About the marginal propensity to consume (MPC)
In economics, the marginal propensity to consume (MPC) is a metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income (income after taxes and transfers).
Image Source: WallStreetMojo