Economy while lockdown

Due to the SARS-CoV 2 pandemic, the economy had to slow down to a minimum within a very short time. What this means and what effects this has, we discuss with Professor Dr. oec. habil. Jan Schnellenbach from the chair of economics, in particular microeconomics at BTU.

How does the Corona pandemic affect the economy?

The effects are very similar worldwide. The so-called lockdown, i.e. the extensive paralysis of public life, has now been implemented in almost all countries. This has effects on both the supply and the demand side of markets. The bottom line is that we are consuming much less, even though demand for individual goods such as breathing masks is currently much stronger than usual. And on the supply side, we have production processes that are interrupted – because value chains have become incomplete, because it has been decided for epidemiological reasons that certain services cannot be offered at present, or simply because workers are absent who are ill or are currently not allowed to enter the country.

This combined supply and demand shock leads to a sharp decline in gross domestic product (i.e. the sum of domestic value added in one year) in all the countries affected. How strong the effect will be for Germany is difficult to predict at this point in time. This is because it depends on many non-economic influences, about which there is still great uncertainty. When will politicians relax the lockdown? When will the infection rates drop significantly? We simply do not know yet.

So we can only look at different scenarios. The German Council of Economic Experts has calculated some rather optimistic scenarios based on the assumption that the medical situation will be under control within a few weeks and public life will quickly return to normal. Then we must expect a GDP loss of 5% this year, but will see solid, positive growth again next year. That would be painful, but easy to bear.

However, there are also pessimistic scenarios from other researchers, which are calculated on the assumption that the medical crisis will continue for months. Then there could be a 20% drop in GDP. This would be dramatic and would also have longer-term negative effects, as it is becoming increasingly uncertain during a month-long standstill which companies and entire economic structures will wake up from their corona hibernation halfway through unscathed. At the moment we can therefore only hope that the epidemiological situation will quickly return to normal.

Which areas are particularly affected at the moment?

All areas are heavily affected. We are seeing large industrial groups that are currently at a virtual standstill and are losing hundreds of millions of dollars in each week of the lockdown. On the other hand, we are seeing specialized shops with low reserves that are having problems paying their fixed costs after just a few weeks. Only a few companies can benefit in this crisis, for example those that produce medical supplies – or toilet paper.
The particular danger of such a massive crisis is that it eats into all sectors of an economy and triggers negative feedback effects. Businesses are no longer able to pay the rent for their commercial properties, landlords have problems servicing their mortgages, demand for real estate is falling, property prices are falling, banks have to write off receivables and at the same time notice that the value of collateral has fallen sharply. And finally, banks are less willing to extend new loans to businesses and households. This is just a simple example of a vicious circle that could become very problematic if it were to come to a long standstill. This is why it is so important that the federal and state governments support companies with massive liquidity assistance.

How do the consequences differ for large corporations, medium-sized companies and solo self-employed persons?

All companies are suffering severely from the crisis. But smaller SMEs and especially the self-employed have the additional problem that they often have only small liquidity reserves. This makes them particularly vulnerable now. On the other hand, smaller companies are sometimes more agile. They build up delivery services in order to still reach their customers, or they convert production. One example is a well-known Swabian medium-sized company that normally produces sportswear and is now entering the market for face masks. Such adjustments are often difficult for large companies. If you produce cars and have a highly specialized production line for a particular car model, you cannot suddenly decide to produce respirators instead.

What do these developments mean for the art and culture scene?

This will undoubtedly be difficult because here you normally depend on direct interaction with customers and the public, which is now completely eliminated. There are operators of concert and event halls who would go bankrupt in a very short time without government support. But here, too, there are quick, creative adjustments. Concerts are played and streamed online without a hall audience, galleries quickly build up impressive websites, lectures and seminars are organized via Skype or Zoom. But despite all remarkable attempts at adaptation, the losses remain high and threatening for many.

Where do the aid measures of the Federal Government start? What do they look like? How do you assess their effectiveness?

The measures make sense in principle, and the speed with which they were conceived and decided was remarkable. Now it is important to use the personnel capacities that are available, for example at the Kreditanstalt für Wiederaufbau, which is central to the implementation of the measures, to get the funds to the recipients very quickly.

In Germany we are in any case quite well prepared with some instruments such as the short-time working allowance to cushion shorter crises without having to make mass redundancies. In addition, there is now direct liquidity support, which the federal government and also the states are handing out to companies. These are important in order to maintain companies as economic organisational units. It is true that in normal times, insolvencies are not a bad thing in macroeconomic terms, but normal and even useful. But in this medical crisis, suddenly functioning companies with plausible business models are threatened because their liquidity breaks down in the short term. It makes sense to prevent this through state aid, also to limit the negative feedback effects mentioned above.

It can be criticised that there are still gaps in the aid programmes after all. Freelancers, for example, who are experiencing a massive drop in sales, have received little support so far. A lot could still happen here. But the politicians themselves probably do not yet consider the rescue package to be ready, so that hopefully there will be improvements.

Another problem could be that the new Economic Stabilization Fund wants to take a direct stake in individual companies if necessary. We know that it is often difficult for the state to dispose of such holdings once the situation returns to normal – think, for example, of the stake in Commerzbank during the financial crisis. However, too much proximity between politicians and individual companies is highly problematic, as it can lead to distortions of competition. It would be more elegant here to support companies with direct transfers and to recover these funds after the crisis, for example by means of a surcharge on corporation tax.

How long can the current restrictions be tolerated economically?

It is not possible to give a fixed date here. It is always a matter of weighing up the options. If the medical costs of a rapid normalisation are exorbitantly high, then one will have to live with the economic costs of a longer lockdown, however painful these may be. However, this trade-off can take into account the fact that the economic costs of a lockdown do not rise more slowly with increasing time, but rather more rapidly. The more time passes, the more difficult it becomes to maintain existing companies and value chains.

We should therefore hope that the strict measures that have now been implemented will quickly reduce infection rates and that it will then hopefully be possible to work with less coarse interventions – following the example of South Korea, for example.

What long-term effects do you fear? Is it possible to return to the economic situation before the crisis? If not, why not?

One cannot rule out a longer-term lockdown with correspondingly serious consequences. In that case, normalisation would also take a long time. It would take years (but not decades) before we reach the GDP of 2019 again. The most likely scenario, even if one talks to epidemiologists, is that we will get out of the current situation by early summer at the latest and public life will slowly return to normal. The cautious optimism of the German Council of Economic Experts therefore seems justified in assuming that we will not see a catastrophic scenario and that we will already see a growing GDP again in the second half of 2020.

In any case, I would warn against discussions about the system. What we have here is an economic crisis caused by a medical state of emergency and the necessary political reactions to it. Rationally, this does not imply any criticism of the market economy. Of course, there are now some demands in the public debate, for example, to implement a "post-growth economy" as an alternative model to the market economy. But this is pure esotericism, which has nothing to do with scientific economics.

What can you say about the effects on the regional economy in Lusatia and the targeted pace of structural change?

When structural change is accompanied by a comprehensive economic crisis, it doesn't make things any easier. The corporate landscape in Lusatia will have to change in the coming years. New companies would have to be set up, existing SMEs would have to grow, and ideally, small clusters of innovative, research-oriented companies would also have to form around the newly established research institutes. This is already a challenge in normal times. But start-ups and solid company growth would become even more difficult in a deep crisis, in which, for example, financing conditions would also deteriorate. If the most likely scenario of a rapid macroeconomic recovery remains, however, it will not have a lasting negative impact on structural change in Lusatia.

Current economic developments are repeatedly compared with the banking crisis of about 10 years ago. Are such comparisons useful?

The comparison only bears fruit if one looks at the course of the GDP curve. The rapid decline in economic output is quite similar – and hopefully the rapid recovery as well. Otherwise, we have a completely different situation here. The causes alone are different. Today we have what economists call a completely exogenous shock. GDP is shrinking because completely non-economic factors are changing the framework conditions in such a way that this is the logical consequence. This time, however, the crisis is not the result of any misconduct or misincentives in the economic system itself. And the political reaction is also different. Whereas back then it was mainly the banks that had to be rescued, now it is a matter of supporting liquidity in the non-financial sector. In this respect, comparisons with the financial crisis are actually of little use.