Economic Trend of the Epidemic: The Necessity of Managing Expectations

In an idealized world, people will isolate themselves until the rate of contamination drops, and after the epidemic ends, the economic engines will re-engage. That is, workers will return to their jobs, factories will continue to work again, and the national and international trade network will start to function again.

The fear of the spread of the epidemic and the health measures taken caused a global supply shock, especially in the manufacturing sector. The isolation of those who are infected has led to less consumption trends in tourism and entertainment sector, as other people reduce social contact. As employees and other consumers remained at home, businesses faced simultaneously falling supply capacity and falling income (Odendahl and Springford 2020). 1f this is not resolved with appro­priate policies, it makes companies to face a decision to lay off or close (Odendahl and Springford 2020). Therefore, mismanagement of the process may cause the economic costs to be much larger and longer lasting (Gourinchas 2020) (Table 8.2).

While there may seem to be a trade-off between health and economic recession, it is not really a trade-off. There is not much to discuss in the face of unemployment and lost lives. In addition, even if there is no restriction, it will still cause an economic recession fuelled by cautious/panic behaviours of households facing the epidemic policy uncertainty where the public is inadequate. Fortunately, economic policy can act decisively to prevent these economic epidemics. The main purpose here has also been to flatten the curve and to keep the economic damage and the decrease in production at a certain level, due to the quarantine of the workforce (Gourinchas 2020).

8.3.1 Economic Impact of the Epidemic

According to (Boone et al.

In terms of supply, workers coming down with the epidemic, babysitters who are no longer needed due to the closure of schools and unfortunately, increasing death rates have led to a decrease in labour supply. However, the main impact of the epidemic on economic activities occurred due to social distancing restrictions and quarantines, leading to large decreases in capacity utilization rates. However, the slowdowns in international trade or the measures taken due to the epidemic have negatively affected the supply chain, increasing the production costs of the compa­nies, resulting in a loss of productivity, and thus a decrease in economic activities. In this regard, China being a supplier of intermediate goods in the electronics, automo­bile, machinery and equipment industries for a significant part of the world played an important role (Gopinath 2020).

In terms of demand, loss of income, fear of epidemics and increased uncertainty have caused people to spend less and increase their tendency to save. Firms have become unable to pay their employees’ salaries. These effects have been more severe for some sectors such as tourism and accommodation. 1n addition to these sectoral effects, the decline in the general consumption trend caused firms to expect lower

Table 8.2 Economic effects caused by social distancing measures in selected countries

France

The French economy faced a deep recession as consumption and investment fell sharply during the restriction period. If the epidemic is limited to the summer period we are in, the real GDP is expected to decrease by 11.4% and grow by 7.7% in 2021. However, if the epidemic creates a second wave, the GDP is expected to fall by 14.4% in 2020 and will enter a recovery process with a rate of 5.2% in 2021. Increase in unemployment can be prevented with policy measures such as strengthened short-term work allowance.

Despite government support, investment and consumption will only gradually improve, as high uncertainty will remain. By the end of 2020, the fiscal deficit is expected to be 10.4% and 12.0%, respectively, according to the mentioned two scenarios, and the decline is expected to push the debt/GDP ratio to 116% and 126%, according to both scenarios, by the end of 2021

Germany

Germany is experiencing a deep recession. If the epidemic is limited to the summer period, the GDP will shrink by 6.6% in 2020. However, in case of a second epidemic wave, it is estimated to shrink by 8.8%. Although the contraction in Germany was smaller than in other major European countries, trade confidence and activity indicators declined to low levels in April. Accordingly, industrial production decreased by 25% in April compared to the same month of the previous year. The share of the automotive sector in this decline is significant. On the other hand, real-time indicators show that economic activity has recovered but still remains below normal, as the restriction measures were eased in May

TheUK

It is estimated that GDP will fall by 14% in 2020 in the event of a second epidemic wave in the UK. Even if the epidemic is limited to the summer period, it is estimated that the unemployment rate will double above 10% and the increase will continue until 2021. In this scenario, the measures to limit the effects of the crisis will increase the fiscal deficit up to at least 14% of GDP in 2020. The source of the expected shrinkage in the UK economy is explained by the fact that it is an economy based on the service sector and that this sector is most affected by the epidemic. Sectoral estimates reveal that staying at home measures will reduce production output by at least 1/3

Denmark

In case of a second epidemic wave in Denmark, it is estimated that the shrinkage in GDP will be over 7% in 2020, and if the epidemic is limited to the summer period, the shrinkage will be 6%.

The United States

The measures taken in the USA have resulted in an unprecedented sharp increase in unemployment, with workplace closures and households staying at home, causing a serious contraction in economic activity. More than 20 million employees lost their jobs in a month, much faster than during the 2008 Crisis or even the Great Depression. The unemployment rate rose to almost 15% in April. In the first quarter of 2020, GDP contracted by 5% on an annual basis

Table 8.2 (continued)

Turkey

Following the positive growth at the beginning of the year, the contraction in GDP is estimated to be 8% in 2020, in the event of a second wave in Turkey, and if the epidemic is limited to the summer period, the contraction is estimated to be 5%. It is estimated that the recovery will be gradual in 2021

Source Prepared by the authors using the information obtained from OECD (2020a, b, c, d) and 1MF Policy Tracker

demand, and thus reduce their expenditure and investment tendencies. This resulted in business closures and layoffs (Gopinath 2020).

In terms of confidence in the economy, uncertainty causes a decrease in consumption of goods and services, and thus a decrease in investments. On the other hand, banks’ expectation that individual consumers and companies will not be able to repay their loans on time may increase borrowing costs and tighten financial conditions. High borrowing costs and low interest rates will expose financial secu­rity gaps that have accumulated over the years, increasing the risk of non-rollover. The decrease in credit may increase the decline resulting from supply and demand shocks. When these shocks spread to other countries through financial markets, these effects could lead to a decline in global activity (Gopinath 2020).

8.3.2 Combatting Economic Impact of the Epidemic

8.3.2.1 Theory: Policies Suggested

As long as governments put into practice early and aggressive economic policies to support the liquidity of firms, balance workers’ wages, protect and promote the financial system, there is a clear path to recovery.

i. Supporting Liquidity

The biggest threat to the economy is the liquidity shortage and bankruptcy of impor­tant companies. Accordingly, temporary disruptions can have permanent effects: if companies do not successfully recover from the bankruptcy wave during the pandemic, future wages of the workforce and the companies’ loss of information will have a permanent impact on the future level of production.

1n order to overcome this risk, cooperation between the institutions that regulate the banking markets of the countries, public investment banks, central banks and finance ministers is important. Banking regulators should encourage banks to transfer existing loans to companies operating in industries severely affected by the recession. However, banks alone will not be able to alleviate companies’ liquidity problems. Extension of credit terms will cause banks to take risks. Public banks should provide incentive loans to more affected parts of the economy (Odendahl and Springford 2020).

Finance ministers should also provide liquidity support through fiscal policy. Companies have to pay labour wages under existing laws, even if they have to reduce production. Governments should consider methods such as short-time working allowances. Although practices such as short-time working allowances provide significant liquidity, they cannot cover all employees. Employees working on tempo­rary contracts, self-employed and workers working without security constitute an important group that cannot be included in this scope. In this framework, in addition to the short-time working allowance, another option is to provide monthly income support to each citizen through private banks (Odendahls and Springford 2020).

On the other hand, to prevent the epidemic, many governments have decided to temporarily close educational institutions such as schools and kindergartens.

In addition to these supports, further financial support can be provided by deferring the collection of certain taxes for a certain period (Odendahls and Springford 2020).

ii. Protection of Financial System

Regulatory and supervisory activities should be carried out with the aim of main­taining the stability and soundness of the banking system and maintaining its economic activities. Ultimately, the economic impact of the pandemic will affect borrowers’ loan repayment capacity and reduce banks’ earnings, which can under­mine bank soundness and stability. Banks should be encouraged to use flexibility in existing regulations and to prudently renegotiate loan terms for problem borrowers. Supervisory authorities, on the other hand, should increase the monitoring of finan­cial soundness and increase the frequency of dialogue with auditees, and prioritize discussions on business continuity planning and operational flexibility (Tosunoglu and Kasal 2020).

iii. Accelerating Economic Recovery

After the epidemic, low demand will continue, especially in the service and tourism sector. Therefore, financial support will be needed especially in these sectors after the epidemic is over. Governments will not encourage people to travel, go to restaurants or attend large gatherings. However, governments could announce that once the epidemic is officially over, there will be, for example, a 6-9 month VAT reduction for the most affected sectors. This will also encourage banks to lend to these businesses (Odendahls and Springford 2020).

However, there is a risk that some governments will not be able to borrow the sums they need because they are already heavily indebted. Given the amounts likely to be required, there is a high risk of another possible loan (Wyplosz 2020).

iv. Instruments and Budget Management

1n order to combat the economic recession caused by the epidemic, most OECD countries make commitments to support economic activities by increasing public expenditures, as well as resort to various regulatory activities and non-flnancial instruments. Measures taken be grouped considering what or whom they aim at: (i) the business world and employees, (ii) households and individuals and (iii) sectors (OECD 2020c).

One of the financial instruments is the budget, and countries affected by the epidemic have developed new approaches to budget allocation, depending on their public financial management systems. Ultimately, taking into account the impact of new economic and financial restrictions due to the epidemic, it is necessary to make new arrangements on the revenue side of the budget, on the one hand, and to make quick decisions on the expenditure side of the budget (Barroy et al. 2020).

8.3.2.2 France

As of 24 March 2020, the French Parliament approved a law laying down France’s 2­month “Emergency Health Declaration”. By this law, the government is empowered to enact such measures, including soliciting people and property needed to combat COVID-19. Based on this mandate, the government is taking many new decisions for budgetary measures it plans to take to combat COVID-19, including the elaboration of supplementary budget laws approved by the parliament (OECD 2020c).

The budgetary measures that the government took to combat the COVID-19 outbreak were announced by the Head of Government on 12 March and became legal with the Supplementary Budget Law adopted on 23 March. A second supplementary budget was adopted in the second half of April.

The first Supplementary Budget Law revised the budget deficit as a ratio of GDP as 3.9% which had been estimated as 2.2% in the current budget. The increase in the budget deficit resulted from the revision of the positive 1.3% growth forecast, which is the basis for the current budget, as -1% contraction. Second Supplementary Budget Law envisaged the ratio budget deficit to GDP as 9%, as a result of the revision of the growth forecast as -8%.

The amount of budgetary measures envisaged by the Supplementary Budget Laws was estimated to be 45 billion euros and 110 billion euros, respectively (1.9% and 4.6% of GDP, respectively) (OECD 2020c). Measures in the said amounts are explained in the table below classified under the groups: measures for the health sector, measures for the business world and measures for employees.

These measures contributed to the 315-billion-dollar bank loan guarantee and insurance program. However, the total financial support increased to around 14% of GDP. The authorities announced that the financial support program would be phased out from June in sectors other than those that had difficulties in reopening the economy, such as tourism that benefits from wage support and solidarity fund, tax and social security premium exemptions for workers employed with reduced hours, and support to these sectors would continue until the end of 2020.

In addition, the authorities announced a second support plan for the most affected sectors. In this context, it was decided to purchase green vehicles and to provide green investment support for automobiles and aviation. However, a third arrangement, which increased the financial support package to 135 billion euros, is planned to come into force after June (IMF Policy Tracker).

8.3.2.3 Germany

The support package named “Protective Shield for Germany” prepared, in two steps, by the Ministry of Finance and Economic Affairs was announced in order to reduce the economic effects of the COVID-19 epidemic. Accordingly, on 13 March, the government announced, as a first step, an initial support package that includes more flexible short-time working allowances, liquidity support through the state bank KfW and tax measures for companies. Ten days later, as a second step, the Protective Shield Package was completed with an expanded aid for the health sector, an emergency aid program for micro-enterprises and the self-employed, and an economic stabilization fund for large companies.

In addition to significant government guarantees, the package resulted in an supplementary budget of 156 billion euros (4.5% of GDP) for 2020. The supple­mentary budget included ˆ 122.5 billion of additional expenditure and an expected loss of tax revenue of ˆ 33.4 billion (OECD 2020c). As of 25 March, the German Parliament convened urgently and approved the Supplementary Budget Law and the Economic Stability Fund Act. The “debt brake clause” was abolished by parliament as the COVID-19 crisis was considered “an extraordinary situation beyond govern­ment control and with a significant impact on the financial situation” pursuant to Article 115 of the German Constitution. Parliament adopted a debt reduction plan that will begin in fiscal year 2023 (OECD 2020c).

Measures for the health sector, measures for households and measures for business provided for in Protective Support Package for Germany are given in the table below. Apart from measures that directly affect the government’s financial balance, the Federal Budget provides a guarantee framework of approximately EUR 822 billion to expand the programs carried out by the German Development Bank KfW to provide liquidity to businesses. The KfW package relaxed business loan conditions for existing companies and assumed credit risks. The package includes applications such as “Start-up Loan” for companies under 5 years old, “Growth Loan” for larger companies and “Quick Loan Program” for SMEs with more than 10 employees.

Other financial measures include providing tenants with greater security in the event of delay in rent and utility payments (electricity, gas and telephone) due to the effects of the pandemic. In addition, the government suspended the obligation to file for bankruptcy by September 2020 (OECD 2020c).

8.3.2.4 The UK

The first coronavirus case was reported on 31 January.

On 17 March, the prime minister established a new ministerial structure consisting of four implementation committees on health, preparedness, economy and interna­tional relations to coordinate the fight against COVID-19 outbreak. Members of the implementation committees—the Chancellor, the Ministry of Health, the Chancellor of the Duchy of Lancaster and the Minister of Foreign Affairs—attend daily C-19 meeting chaired by the prime minister and report (OECD 2020c).

The British Parliament was closed on 26 March, within the framework of the measures introduced against the COV1D-19 outbreak, and on 21 April, and re­gathered in the budget legislative process. Parliament passed two laws which also passed Royal Approval before closing. The first of these laws is the Emergency Fund Law for 2020. This fund enabled the government to spend up to 48% of the 2019-20 expenditures (approximately 266 billion GBP) within the framework of combating COV1D-19. The second law approved by the Parliament was the Coro­navirus Law. This law identified five areas, namely increasing the capacity of the national health system, reducing the burden on healthcare personnel, reducing social contact, conducting burials of those who died due to the epidemic and supporting citizens, in order to strengthen the epidemic response plans. The law is in force for two years and empowers the government to take measures in these five areas to act on the recommendations of healthcare professionals (OECD 2020c).

The first budgetary measure of the government started on 11 March, which was announced at press conferences on Downing Street on 17, 20, 26 March and 8 April. Within the scope of combating the pandemic, the government announced a financial package estimated to amount to GBP 86 billion (4.1% of GDP) by the UK Budget Office (OECD 2020c). The measures put forward in this framework include extra financing for the health sector and public services, support for individuals, businesses and charities affected by COV1D-19 and are explained in the table below. 1n addition to these budgetary measures, the Bank of England launched the “COV1D- 19 Corporate Finance Support” on 23 March, to provide liquid support to large companies reporting cash problems. 1n this way, the shares issued by the companies were purchased by the bank through printing money.

8.3.2.5 Denmark

1n Denmark, where the first COV1D-19 case was reported on 27 February, all parties in parliament (Folketinget) supported the government’s measures to use all necessary tools to combat the COV1D-19 outbreak and amended the Danish Epidemic Law by expanding some powers of the prime minister (OECD 2020c).

The government announced the first package of measures to reduce the economic consequences of the spread of COV1D-19 on 10 March. Accordingly, approximately 60 billion DKK liquidity support and state guarantee were provided to the economy, with the addition of 10% of GDP to the Consolidated Financial Support Program, which corresponds to 2.7% of GDP. In addition, the government made a commitment to provide the necessary support to the health sector, but did not specify an amount (OECD 2020c).

Four economic packages were implemented to provide direct cash support to workers and companies and to increase access to liquidity. In this context, emer­gency legislation supporting company liquidity by temporarily postponing compen­sation of event organizers, VAT and other tax liabilities of event organizers who had cancelled their events also took certain measures targeting the existing challenges in the transportation and tourism sectors (OECD 2020c).

Another financial support to combat the epidemic is expected to come from Denmark’s powerful automatic stabilizers. The size of the support to be obtained here is expected to be 2.5% of 2019 GDP. However, postponing the investment programs included in the medium-term programs of local governments created an additional financial resource of 2.5 billion DKK.

Recently, the Danish authorities decided to extend the first fiscal measures until 8 July, resulting in an increase of DKK 30.7 billion in financial support and an increase of DKK 70 billion in guarantee and liquidity measures. On 19 May, the decision was made on the green renewal project of public housing (DKK 30.2 billion) in the period 2021-26. In addition, an additional DKK 0.8 billion was allocated to create public employment in health services and social services in June (IMF Policy Tracker).

8.3.2.6 The USA

In the USA, the White House established the Coronavirus Task Force on 29 January to coordinate the fight by the administrations with the epidemic, following the first COVID-19 case reported in Washington State on 20 January.

On 13 March, the American President declared, based on the provisions of the Stafford Act, that the epidemic was a national emergency and that the federal govern­ment would use the Minister’s Disaster ReliefFund (US $40 billion) to combat the epidemic. This statement prompted the Federal Emergency Management Authority. On 27 March, when there was a shortage of medical supplies at the national level, the president asked the General Motors Company to prioritize the production of ventilators for use in the treatment process, based on the provisions of the Defense Production Act of 1950.

Budgetary measures of the federal government were made possible by supple­mentary allocation laws approved by the US Congress. In addition to the Pay As You Go Act enacted in 2010, the enactment of three additional allowance pack­ages provided an exemption from the rule that new expenditures can only be made through spending cuts or income increases. However, new measures were devel­oped to monitor the implementation of allowances (OECD 2020c). In this context, the Independent Committee of Outbreak Healing Inspectors and the Committee for Combating the Outbreak were established under the Council of the Inspectors General on Integrity and Efficiency to monitor how the federal government’s funds allocated to combat the epidemic were used (OECD 2020).

In the first stage, Coronavirus Preparedness and Response Supplemental Allowance Law (8.3 billion USD) was enacted; in the second stage, Families First the Fight Against Coronavirus Act (3.5 billion dollars) was enacted; and in the third stage, additional $2.2 trillion was provided for direct payments to taxpayers, emer­gency loans to distressed businesses, supplementary financing for the healthcare system, suspension of payments for federal student loans and revisions to student aid provisions. The government continues to work on the fourth package of financial measures. In response to the COVID-19 outbreak, the financial measures taken by the Federal Government are estimated to be US $2.2 trillion (10% of GDP). The Parlia­mentary Budget Office estimates that the country will exceed a $1 trillion budget deficit by the end of the year. In this context, the measures taken in the context of COVID-19 bring along a significant increase in the country’s debt levels, reflecting the scale and gravity of the situation (OECD 2020c).

8.3.2.7 Turkey

The first COVID-19 case in Turkey was reported on 10 March, but 31 days before the WHO declared the disease pandemic, the Ministry of Health established an Operations Center, and the Scientific Committee, which provided scientific opinion on the steps to be taken in the COVID-19 process, was established on the same date. According to the pandemic scenarios described, the healthcare professionals have not been allowed to take leaves and healthcare personnel and equipment plans have been made for each region. Thanks to the social distancing measures taken, 40% of the population has been effectively isolated. Curfew has been imposed, since 9 April, on weekends and public holidays for all age groups in 31 metropolitan cities, which constitute approximately 87% of the population, and entering or exiting these cities is not allowed on non-holiday days, as well. This way, it has been possible to control the rate of spread of the epidemic and the rate of increase in mortality.

Although the first peak of the epidemic was passed thanks to these efforts, inten­sive care bed occupancy rate reached only 6% and the ventilator occupancy rate reached only 5%. COVID-19 has not put pressure on the health system of Turkey (in aktob.org.tr∕news(covid-19-salginina-karsi-mucadelede-turkiye-onde). This was mainly because of the fact that Turkey spent the last 15 years restructuring the healthcare system. In this context, new hospital capacities have been built, and thanks to the city hospitals built in recent years, 11 new hospitals with a total of 14,000 beds are planned to be put into service in 2020. In addition, major invest­ments have been made in health information technology (aktob.org.tr∕news(covid- 19-salginina-karsi-mucadelede-turkiye-onde). In an environment of public health crisis, the Turkish state has prevented a potential crisis in health equipment by adopting the strategy for the development of health technology. Under this strategy, Biyovent domestic respirator was manufactured by Biosys company, as a result of 5 years of design and testing process, with the support of the Ministry of Industry and Technology, TUBItAK and Bilkent University Cyber­park (TUBItAK, bilimgenc.tubitak.gov.tr/makale/turkiyenin-ilk-yogun-bakim-tipi- solunum-cihazi). Accordingly, the Ministry of Industry and Technology and the Ministry of Health brought three technology companies (Arqelik, Aseldan and Baykar Savunma) and Biosys company (Bakir 2020). This way, 5,000 ventilators were produced as of May with the purchase guarantee of the Ministry of Health.

The Ministry of Health announced recruitment of 32,000 new personnel.

Within the scope of efforts to improve the additional payments of healthcare personnel, it was decided to make additional payments without being subject to the principles determined by the regulation, for 3 months effective from 1 March 2020, to the personnel and managers working in the medical faculties of universi­ties and health practice and research centres within the scope of research, diagnosis and treatment activities for the COVID-19 outbreak, provided that the scope and rate are determined by the university administrative board in terms of the loca­tion and personnel (aa.com.tr/tr/turkiye/saglik-personeline-ek-odeme-yapilmasina- iliskin-yonetmelik-resmi-gazetede-1777971).

On 24 March, Parliament adopted a law providing for amendments to certain laws in the economy under the Economic Stability Shield Program. The size of the Economic Stability Shield Package is 100 billion TL. Detailed information about the contents of the package is given in the table below. In addition, the president called on financial institutions to take the necessary measures to reduce the impact of COVID-19 on the economy, such as expanding credit terms and meeting the liquidity demands of businesses and individuals to sustain growth. Based on this call, three public banks initiated, on 30 March, a 6-month non-refundable Personal Consumer Loan to support households with a monthly income of less than 5,000 TL (OECD 2020c).

In addition to these measures, on April 15, the Ministry of Health launched a successful Contact Tracking Program to monitor the contacts of each new coro­navirus case and subsequently prevent the spread of the disease. On 18 April, it launched the Pandemi Isolation Monitoring Project, which aimed to monitor whether the cases comply with the isolation measures. This operational capacity has been achieved thanks to the successful cooperation and coordination between different public and private sector organizations, including the Ministry of Health, Information and Communication Technologies Authority and GSM operators (Bakir 2020).

In June, the authorities stated that the measures taken against the epidemic with additional policy measures rose to 498 billion TL (10.8% of GDP), including deferred loan payments. In order to prevent speculative investments, the Banking and Insur­ance Transaction Tax rate was increased from 0.2% to 1% in foreign currency and gold purchases, and the withholding tax rate on interest income obtained by banks from commercial bonds was increased from 10 to 15%. Besides, again in June, a new law raised the upper limit of the Treasury’s special purpose local government bond issuance from 3% of the 2020 budget revenue forecast to 5% (IMF Policy Tracker) (Table 8.3).

Table 8.3 Financial support packages in selected countries

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COVID-19 Outbreak and Budget Management: An Assessment..

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COVID-19 Outbreak and Budget Management: An Assessment..

Source Prepared by the authors using the information obtained from OECD (2020a. b. c. d) and IMF Policy Tracker

8.4