Education Information

3. The weakness of aggregate supply and the impact of Covid-19 Everyone recognises that Covid-19 was a catastrophic shock for the world economy. With new variants circulating, and lockdowns and restrictions recurring in different parts of the globe even in 2022, along with the continuing pressure on healthcare systems, the pandemic will be a source of serious difficulties for a long time yet. If we set aside the public health aspect of Covid-19 and look only at its economic impact since early 2020, we can easily identify a crucial part of the inflationary surge that we are experiencing. Lockdowns and other restrictions were implemented by governments across the world from early 2020, starting with the lockdown of Wuhan in China on 21 January. At the height of the efforts to suppress the disease, some two and a half billion people lived under some form of serious restriction. Such unprecedented restraints placed on so many countries across the world inevitably had a massive impact on economic activity. Aggregate demand collapsed as people were not allowed to live normally, and demand especially for services like airline travel or shopping on high streets or restaurant meals, fell very sharply. Aggregate demand also fell as enterprises postponed their investment plans in the face of great uncertainty. Responding to the collapse in aggregate demand, many enterprises rapidly cut back supply – especially of services – in many cases, going bankrupt, or in others making staff redundant. The shock to aggregate supply was great, particularly as in the UK the supply side has been weak for many years. In 2020 several countries in lockdown plunged into one of the worst recessions seen in history. Only extensive UK government support, provided mostly to 1.9 million enterprises, prevented even more widespread unemployment and misery. Support included increased spending to pay for workers’ wages, such the £70bn furlough scheme in Britain. It also included subsidies, tax relief, postponement of

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