The stock markets have plummeted and oil prices have fallen. The coronavirus outbreak is causing panic on the financial markets and in businesses worldwide. What does the impact of this virus mean for the real economy? Bas Jacobs, Sijbren Cnossen Professor of Public Economics, was a guest at Dutch radio station BNR Nieuwsradio where he gave his view on the current situation and suggested possible government policies to absorb the economic shocks the virus has already caused and will likely keep on causing.
Jacobs believes the drop in the oil price can be considered good news. ‘Around the world, we are seeing that production chains are becoming disrupted. There is a negative supply shock in the global economy. However, the fall in oil prices is creating a positive supply shock which is dampening the current economic downturn. This is, of course, inconvenient for oil companies but positive for the economy as a whole.’
We need to take this seriously
According to predictions of the Netherlands Bureau for Economic Policy Analysis (CPB), the national economic growth for the year will be 0.7 percent, taking into account current events and spill-over effects from countries such as China and Italy. Due to the current financial situation of the Dutch government, it can most likely absorb the economic shocks relatively well. According to Jacobs, the government is in a position in which it is perfectly capable of implementing counter-cyclical policies such as a decrease in taxes and an increase in government spending. However, the CBP prediction can be taken with a grain of salt, it's very difficult to predict future occurrences, and considering the recent lock-downs, travel bans, and other measures which have been taken on a global scale, we can expect serious effects on the real economy.
Coronavirus officially a pandemic
On a European level strong actions need to be taken as well. Countries should try to relax budget controls in a synchronised manner. The Central Bank must ensure the availability of liquidity for banks and businesses to prevent them from collapsing in the short term. Jacobs hopes that countries have learned from the previous economic crisis, because a new one is already looming.
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The full BNR Nieuwsradio item of 9 March 2020 can be found here (in Dutch).