VU Researchers Study the Economic Impact of the COVID-19 Pandemic

The COVID-19 pandemic has triggered a global health crisis. This was announced on 30 January 2020 by the World Health Organization, which stated that the outbreak was a public health crisis of international importance. The crisis also caused fears of an impending economic downturn. The situation has been analysed by national governments, international organizations and scientists.

Many businesses experience financial distress

VU researchers have carried out a study, “Model for assessing the effectiveness of measures for mitigating the impact of the COVID-19 pandemic on the financial system and sustainable economic growth”, which argues that the lockdown restrictions have had a significant impact on the production of goods. Through illness or contact with an infected person, workers cannot carry out their operations, or due to restrictions on movement adopted by governments, they must remain in self-isolation or at home. The supply chain therefore becomes interrupted and businesses are forced to restrict or terminate their operations.

“Companies are experiencing financial distress. Furthermore, businesses are interconnected through trade and the distress is transferred and strengthened through supply chains. Finally, because of an uncertain future, businesses are holding back on planned investments. Employee income from labour is decreasing, which threatens overall household income and, at the same time, household consumption is falling due to increasing uncertainty about the future. This has led to a ‘demand shock’. Ultimately, the COVID-19 pandemic is affecting the global financial markets,” Rasa Kanapickienė explained.

According to the VU researchers, in summarizing the situation the Organization for Economic Cooperation and Development has stated that under the circumstances, governments must seek to help employers and self-employed people to solve their liquidity problems but also strengthen support for workers and their families.

A Communication from the European Commission on 13 March 2020 stated that one of the objectives is to ensure that workers in Europe (including the self-employed) are protected against income losses and that the most affected companies (especially SMEs) and sectors have the necessary support and financial liquidity.

The impact of the pandemic was studied from several angles

Sustainable economic growth on national agendas is becoming even more relevant in the context of COVID-19. Therefore, according to the researchers, in order to mitigate the social and economic consequences of COVID-19, complex measures and actions are required. “Political decisions must be taken expeditiously, laws must be adjusted, and non-traditional financial bailouts must be applied in order to minimize the impact of the pandemic on both sustainable economic growth and the functioning of the financial markets,” Deimantė Teresienė said.

In June-December 2020, the project conducted by the VU researchers examined the impact of the COVID-19 pandemic on the financial system, sustainable economic growth, and on the risk management of the institutions involved in the elimination and minimization of the consequences of COVID-19.

For an assessment and analysis of the regulatory environment, decisions by the European Central Bank (ECB) to address the impact of the COVID-19 pandemic on the financial system and on sustainable economic growth were analysed. The researchers focused on an evaluation of the credit channel of the monetary transmission of the Central Bank, because this is one of the main sources supporting sustainable economic growth.

“The analysis of the banking sector in the euro area showed that the risk tolerance of banks is the strongest factor affecting credit standards for long-term loans to businesses. The spread of the COVID-19 pandemic did not significantly increase the overall level of financial stress in the euro area’s financial systems. Although the profitability and resilience of the banking sector have decreased, liquidity has increased, which may be indicative of the positive impact of monetary policy and the measures taken by commercial banks,” Deimantė Teresienė and Greta Keliuotytė-Staniulėnienė commented.

The researchers say that in the case of Lithuania, loan guarantees provided by the government have contributed positively to a growth in lending volumes during the pandemic, but the lending margins have not decreased due to the aid measures applied. According to the researchers, this shows that central banks find it quite difficult to contribute to sustainable economic growth using the credit transmission channel as a tool for monetary policy.

Government assistance to businesses and citizens

According to the researchers who carried out the study, the results have shown that the actual impact of the economic aid measures so far taken by governments is not yet visible on countries’ economic performance. It has also been identified that during the period under consideration, the announcement of economic support measures had a positive impact on the overall economic sentiment indicator.

“The COVID-19 pandemic has had a short-term impact on consumer/household expectations, on the expectations of the retail, construction and manufacturing sectors, and on overall economic sentiment. The effect itself was quite strong, but it lasted quite a short while, because after a brief decline in expectations in April a recovery of expectations was recorded in May and continued beyond that,” Mantas Valukonis noted.

When assessing the impact of COVID-19 on the financial system through the prism of the financial markets, the researchers established that the spread of COVID-19 and the risk of mortality have had a negative impact on the stock and bond markets. The markets responded more sensitively to the growth in the number of deaths due to COVID-19 in Europe than in China. The strongest negative response of the markets and the highest volatility of sustainable and socially responsible stock indices was observed in March-April 2020, followed by a very minor reaction and a decline in volatility attesting to an adjustment of the markets.

“The initial reaction of the bond markets was the growth of corporate bond risk premiums, which indicated the growing credit risk and the increasing cost of borrowing through the bond market and increased the burden of business debt. However, due to the uncertainties in the duration of the pandemic and its consequences, it is necessary to continue the research as soon as possible to assess the long-term impact of the pandemic,” Deimantė Teresienė and Greta Keliuotytė-Staniulėnienė asserted.

The study “Model for assessing the effectiveness of measures for mitigating the impact of the COVID-19 pandemic on the financial system and sustainable economic growth” was conducted by researchers at the Faculty of Economics and Business Administration of Vilnius University in the context of Research Council of Lithuania project No. S-COV-20-21: Dr Rasa Kanapickienė, Dr Deimantė Teresienė, Dr Greta Keliuotytė-Staniulėnienė, Daiva Budrienė, Dr Jekaterina Kartašova, and VU Kaunas Faculty researcher Dr Mantas Valukonis.