Blog: From shutdown to recovery: unraveling the impact of COVID-19 on small firms

Small businesses will travel through four phases of impacts in the months ahead.

The coronavirus pandemic has forced nearly one-third of the world’s population into lockdown. Everyone agrees that governments need to act fast to save lives first, as well as reduce the adverse impact such measures can have on their economies. Economists and experts around the world are therefore looking at policy mixes and miracle recipes to reduce the economic impact of the pandemic.

While the discussion often leans toward the macroeconomic impact of this pandemic storm, an old citation by Paul Krugman reminds us: ‘Countries do not buy or sell goods overseas; companies do.’¹ The COVID19-induced slowdown affects the real economy, which is, after all, made up of businesses and the people that work for them.

Small companies are likely to suffer more than others in the private sector because they are inherently vulnerable. To help micro, small and medium-sized enterprises (MSMEs), we must understand that the crisis will not hit them all at once, but will affect them through a whole cycle of impacts.

As small businesses ride out the days ahead, they will travel through four phases, either successively or simultaneously. From partial to full shut-down, to supply chain impacts and depressed demand, the cycle will eventually lift with recovery, as the following figure shows.

1. Shutdown impacts are affecting countries and regions where the pandemic led to partial or complete shut-down of the economy by government decree. Containment measures have hit hardest in the tourism, travel, wholesale and retail, hospitality and entertainment subsectors. In the short run, governments in affected countries are focusing on keeping MSMEs in these subsectors afloat.

2. Supply chain disruptions are affecting companies around the world. There are two reasons. First, the pandemic shock in China affected that country’s production and exports. Second, the same phenomenon is occurring in other regions, including Europe and North America. As production halts in affected regions, this reduces the inputs available for global value chains that source from them. The extent of this trade-induced cascading contagion of input shortages will differ by value chain and country.

3. Demand depression is experienced in pandemic-affected countries as lower sales. Consumers and business buyers reduce purchases, owing to self or government-induced confinement. Even in countries relatively unaffected by COVID-19, MSMEs that supply to overseas buyers will see their orders reduced – as affected businesses and consumers overseas reduce their demand. Once the health emergency is over, business investment may be low owing to run-down savings. Households may reduce spending in the medium to long-term to compensate for lower pandemic-period incomes. Confidence might be low, credit overstretched, and bankruptcies among MSMEs may follow.

4. Recovery will begin once the health emergency is over, and containment of people comes to an end. Indeed, economic activity is likely to see a sharp rebound, as people go back to their favourite small businesses to buy what they have been missing. Manufacturing and agricultural businesses may have higher sales as inventories are restocked and consumers make postponed purchases.

The specificities of each of these four phases indicate that there is no ‘one size fits all’ solution. Not all policies are right for the situation facing MSMEs in a given country at a given time. Government policies that are well-adapted to the phase of the crisis faced by their MSMEs will be more effective and use available policy and financial resources more efficiently.

¹ Kurtzman, J. (1998). An Interview with Paul Krugman. Retrieved 25 March, 2020, from https://www.strategy-business.com/article/13652%3fgko%3dd3cab.