Since the last recession that started in 2008, the economy has been booming. Making money in the stock market was easy and almost everyone felt capable to do so. However, the Coronavirus outbreak has hugely affected companies, consumer spending, and overall economic expectations.
What is happening?
At the time of writing, Europe and the US are being overwhelmed with the spread of the Coronavirus. This comes with many uncertainties and a huge economic impact.
First things first
As we all know by now, the virus started in Wuhan, therefore spreading first through China. China’s industry was the first to be affected by this virus, however, also many European and US-based companies heavily rely on China, both for the assembling and the supply of vital parts of their product. This meant that even in the early stages of the Covid-19 spread, many companies were already affected.
Spread through Europe and the US
Eventually, the virus started Spreading through Europe and the US. The effects of the virus are so severe that many companies have to stop their activities, some countries are going into lockdown and only the most vital businesses remain active.
Effect on the economy
People are panicking, not only for their health and the health of their loved ones but also for their finances. The GDP (Gross Domestic Product) is expected to shrink a lot. Meanwhile, the ECB (European Central Bank) and the FED (US Federal Reserve) are pumping billions into the system to stimulate the economy.
How will the fiscal stimulus affect the economy?
Fiscal stimulus can be done in several ways. Some examples include tax-cuts, fed buying government bonds to provide money to governments, debt cancellation, or even handing out money to the people. The fiscal stimulus package is targeted to stimulate the economy. The stimulus is therefore used to stimulate incomes and output in the short run.
It’s important for this stimulus to be timed precisely, targeted right and to be temporary. If this isn’t the case, the stimulus could have some negative side effects.
The stimulus must be targeted at the right businesses or parts of society. Its intent is to stimulate the economy, thus, the money must be spent in order to stimulate the production of goods and services and, therefore, grow the GDP (Gross Domestic Product). Often, lower-income families are targeted to get the benefits of a stimulus package. The reason for this is that lower-income families usually are most affected by economic downturns. While high-income families likely will have to decrease their savings, low-income families often have to decrease their spending. If the stimulus isn’t targeted right, the money will be saved and only have an inflationary effect over time.
Another important aspect of the stimulus package is that it needs to be temporary and timed precisely. If this isn’t the case, growth, or inflationary issues could occur.
In order for an economy to work, there must be a balance between GDP and inflation. In other words, there must be a balance between the supply of goods and services, and the supply of money.
The lesson to learn is that currently both demand and production are down. This means the GDP is currently shrinking. If after this crisis we want the economy to repair itself, we need to increase the production of goods and services again. To do that, people and businesses need money. If they don’t have it, the demand for those products and services won’t increase. That’s why governments are stimulating the economy.
In other words, currently, the government is printing money and giving it away.
The governments are both fighting a Pandemic and a recession. If the monetary actions are working as planned, the economy might recover fast, however, there is also a risk of inflation and instability.
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*DISCLAIMER: The content on this website is made in good faith and I believe it is accurate. However, this content should be considered informational and not for making financial decisions.