What the Spread of the Corona Virus and Economic Growth Have in Common

Corona Wirtschaft

Whenever COVID-19 is mentioned, it is said that viral infections spread exponentially. Specifically, this means that the number of people infected doubles in each period of time. The reason for this is that one person can infect at least one other person (1.6 to 2.4 other people according to the latest findings). Thus, the more infected persons there are, the more they can infect others, which is why an enormous increase in the number of cases can be observed in a relatively short time. The implemented measures, above all the #SocialDistancing, are supposed to prolong the time span in which a doubling occurs by reducing the number of possible contacts. This is the only way, according to the premise, to ensure that the existing capacities of the health system are enough – #FlattenTheCurve.

Contagion effects also exist in the economy. At the macroeconomic level they are called the multiplier effect. The result is very comparable: An initially rather small stimulus has a much larger impact – this applies both to positive impulses (e.g. higher investment activity by companies) and negative ones (e.g. slump in consumer demand). Unfortunately, in the current corona crisis, the negative viral contagion effect and a negative economic multiplier effect are occurring simultaneously, which will have devastating effects on society and the economy. In other words, in the end nobody wins and even supposed beneficiaries lose.

In order to slow down the pandemic, a lockdown was imposed, and many business activities were banned. This is the first impulse that will multiply economically and thus produce significant losses: Let us start with the fact that many gastronomic businesses now generate little or no revenue, leaving their owners and their staff either with reduced or, in the worst case, no income at all. This affects their consumption behavior or demand, as they must limit their expenditure to the bare essentials. This decline in consumption will affect other sectors. Especially those that offer goods that are not necessary and can therefore be dispensed with, such as products of the entertainment industry. This means that there will be a decrease in revenue, and thus in income, as well, which will reduce the demand of the people working there. This further decline in demand now affects, for instance, the fashion industry, with the result that a decline in demand will also emerge from there. This process will eventually continue throughout the economy and across all sectors. In the end, consumers will finally restrict their consumption of food such as flour, noodles and rice on a macroeconomic level, and in the end even of toilet paper, which is incredibly valuable in these days.

The severity of the economic downturn will depend on how extensive the restrictions are and how long they last. This explains why a prolonged lockdown has even more impact on the economy, as more and more impulses accumulate over time and therefore have more time to intensify. Like the spread of the corona virus. However, there is currently a trade-off between the two: the longer the lockdown, the more the virus can be contained, but also the greater the negative impact on the economy.

So, what does this imply? Everything should be done to keep the lockdown as short as possible. A one-off sharp decline is less dramatic because it takes a little time for it to penetrate the economy and therefore immediate measures such as higher government spending can nip it in the bud. In addition, the economy can overcome the downturn relatively quickly with other positive stimuli. In contrast, protracted smaller declines, which, however, always generate new negative impulses for the economy, will have much larger, more lasting and worse effects on the economy and thus ultimately on society.

Thus, #StayHome to #BeatTheVirus and #SaveTheEconomy!

MBS Dr. Florian Bartholomae
About Prof Dr. Florian Bartholomae 30 Articles
Prof. Dr. habil. Florian Bartholomae is Professor of Economics at Munich Business School. His research focuses on the economics of the information society and regional economics. At MBS, he teaches the basic economics and mathematics courses in the Bachelor's program as well as advanced economics subjects in the Master's program. In addition, he is a private lecturer at the Institute of Economic and Legal Principles in Global Industry at the Universität der Bundeswehr München as well as a partner in the political consultancy Bartholomae & Schoenberg Partnerschaft. Furthermore, Florian Bartholomae is an external lecturer at the IMC University of Applied Sciences Krems and conducts research on current economic and economic policy issues together with Alina Schoenberg, academic director of the Master's program "International Business & Economic Diplomacy" at the IMC University of Applied Sciences Krems.