Is COVID-19 An External Demand And Supply Shock Or Domestic?

Is COVID-19 an external demand and supply shock for the Kenyan economy or domestic? Initially, it looked like external but the World Bank thinks otherwise.

According to the 21st Edition Kenya Economic Update Report by the World Bank Group, initially, COVID-19 looked like an external demand and supply shock that involved a decline in commodity prices, falling demand for exports -including for services like tourism-, disruption in the global supply chains.

However, the policies that have been needed to contain the spread of the virus such as social distancing, home confinement, travel restrictions, closure of schools, closure of bars and restaurants, suspension of public gathering and conferences, and a nightly curfew) being deployed to delay the spread of COVID-19 are constraining domestic demand.

In this situation according to the World Bank, households tend to ramp-up their precautionary savings, while firms wary of investing until the crisis clears with negative impacts on aggregate demand.

There are also feedback loops into a domestic supply shock, as firms that are dependent on cashflows lack the liquidity to fulfill commitments (pay salaries and suppliers) due to falling demand and could end up closing down due to bankruptcy.

The World Bank projects that in 2020, the growth performance of services and manufacturing will be severely impacted by the COVID-19 pandemic.

Actual data on the impact of COVID-19 on the value-added across sectors is not yet available, but preliminary high-frequency data indicate a significant slowdown in services and manufacturing.

Retail and wholesale, transportation, accommodation, and restaurants have been adversely affected by public health measures to contain the spread of COVID-19.

Mobility trends relative to pre-COVID-19 for Kenyans to restaurants, cafes, shopping centers, theme parks, museums, and movie theatres have contracted by up to 45 percent. Similarly, mobility trends to public transport stages, grocery and farmers markets, workplaces, and National parks have all been negatively affected.

Mobility around residences has increased by 17 percent relative to the baseline reflecting working from home policies and closure of schools and other entertainment spots.