HH Can The Economy Withstand A Second Round Of COVID-19?

If we use the COVID crisis as an opportunity to make the economy flexible and resilient, we will come out of this, economically bruised but not beaten, and prepared for however many more waves there might be.

Image credit: Josue Isai Ramos Figueroa on Unsplash

Some 100 million people in China are now back in lockdown as fears of a second wave surge. Now that the US and the rest of the world is opening up, the probability of infection will most likely go up, as will the number of infections. What does that mean for the economy?

First, uncertainty and fear of another lockdown will negatively influence business decisions and overall economic recovery. Even if your business survived the first wave, would you be willing to go all in, invest, rehire people, renew leases, etc., if you think you will be shut down in the autumn?

Second, we should not underestimate how much the fear of the actual virus also influences people’s behavior. Even if there were no lockdowns, some people would avoid eating out, going on holidays or even trips to the barber shop. Some people will continue their changed behavior even if all restrictions were lifted, which means that for some businesses there will be no going back to business as usual, because there will be no business left.

Third, people tend to get more risk-averse or skittish after financial uncertainty shocks, which is only natural. Some people will be more frugal with their money, think twice whether they want to take out a loan to buy a new car if the current one is still running. Frugality is a virtue and helps in the long term. But in the short term it means that for some businesses going back to business as usual will be a process rather than an instantaneous snapback.

Speaking of processes, going back into business is not without extra costs. There exists numerous recommendations on how to ensure that even in places with low probability of infection (i.e. offices) the employees are protected. Recommended regular cleanings, plexiglass separators etc.—those cost money.

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Zilvinas Silenas became President of the Foundation for Economic Education (FEE) in May 2019. He served from 2011-2019 as the President of the Lithuanian Free Market Institute (LFMI), bringing the ...

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