Continuing to work during the coronavirus outbreak keeps prices down

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“It seems like such a simple question – will the virus outbreak push the cost of groceries up? I was on the Dutch TV programme AD Ochtendshow this week when that question came in from someone interviewed on the street.

Will the virus outbreak push the cost of groceries up? Sandra Phlippen Chief Economist ABN AMRO

The same question is on the minds of economists worldwide. They just formulate it a little differently: ‘is this a supply shock or a demand shock?’ A supply shock makes groceries more expensive and a demand shock makes them cheaper. I think it’s both, and that means the central banks and governments need to pull out all the stops to prevent a global recession.

China itself sent a first supply shockwave around the world in January and February. When a manufacturing powerhouse like China stalls, it causes shortages in all kinds of things. Between 10 and 15 percent of products and semi-manufactures in Europe come from China. That’s a substantial amount, but still a lot less than in the US, where 30-35 percent of products are imported from China. This means prices should go up.

But China is also a major buyer on the world market. China is the biggest customer for raw materials like copper and oil. Prices have been falling visibly since the start of the outbreak, which has made products cheaper. China is also an incredibly important ‘culture purchaser’. Since the huge stream of Chinese tourists dried up, shops, restaurants and airlines around the world have seen their customer base shrink. This is forcing them to cut prices. Fortunately, the Chinese economy now seems to be over the worst. By 6 March, 53,726 of the 80,000 people infected had recovered.

On top of this, there’s been the effect of behaviour in countries outside China this week and last week. We are staying indoors to be on the safe side, cancelling events and working from home wherever possible. As long as our response is limited to travelling and dining out less and working from home more, there will be a drop in demand and so prices will drop too.

Overall the demand shock appears to be dominating. In a sense that’s good news, because we have a better idea of how to combat it. Central banks can cut interest rates, expand asset purchase programmes and inject liquidity into the banking system, making it attractive to spend money and less attractive to hoard it. It’s doubtful this will have any effect on consumers, because if fear of infection or compulsory quarantine is keeping you inside, reduced interest rates aren’t likely to make you behave differently.

To prevent the situation being aggravated by supply problems – which could trigger a deep recession as there are almost no quick fixes for these – we need to try to stay productive. The Dutch Minister of Social Affairs and Employment this week announced shorter working hours to help struggling businesses cut costs without going bankrupt. So far, 658 businesses have applied for the scheme. Schools are being told to stay open as much as possible so that parents can keep working. People in the town of Loon op Zand, where infections have been reported, are setting an example: ‘just keep on as usual’ one farmer said on TV. The British queen would advise us to ‘Keep calm and carry on’.”

Every week, Sandra writes a newspaper column for daily newspaper AD (in Dutch only), which can also be read here.

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