Analysis of demand decline and their ripple effects as a result of Covid19 and measures to reduce the spread of infection

On Thursday, March 12, stringent measures were introduced in Norway to reduce the spread of the coronavirus (SARS-CoV-2). Except for children with parents in critical social functions, schools and kindergartens were closed. School education was transformed into home education with effect from Friday, March 13. Extensive use of home office was introduced in businesses where possible. A 14-day quarantine was introduced for persons who had been abroad. From Monday, March 16, extensive border controls were introduced to limit the spread of infection from other countries to Norway. In addition, many bans and closures were introduced, including bans on sporting events and organized sports activity, and closure of gyms and swimming pools and services offering hairdressing services, massage and body care and the like.

The measures (combined with the seriousness of the situation becomes clear to the population) led many companies to lay off employees. NAV's new weekly statistics for the labor market show the number of fully unemployed increases from 65,000 on March 10 to 291,000 on March 24.

Companies that are temporarily closed down in connection with the coronavirus not only reduce their activity. The companies also buy goods and services from others, and when the business is temporarily shut down, this will also have an impact on subcontractors. This analysis attempts to consider such ripple effects. To do this, we use an input-output model based on the national accounts. An input-output model shows deliveries across industries in the form of product efforts. The input-output model we use in this analysis shows deliveries between different products.

The input-output analyzes consider imported product input, including through subcontractors, in addition to direct import of final deliveries. However, the static input-output analysis does not consider factors such as changes in relative prices, effects of changes in earnings, changes in production capacity (investments), and changes in interest rates and exchange rates. We have previously used similar analyses to analyze the ring effects of the petroleum industry, see, for example, Brasch, Hungnes, and Strøm (2019).

In this analysis, we start by illustrating the properties of the input-output model by looking at the ripple effects by changes in the demand of a particular product. Here we have selected the consumption of hotel and restaurant services. We then show the overall reduction in mainland GDP when we introduce a reduction in all the demand components that we assume will be affected. The effect of each demand component is shown separately, such that the figures can be used to create different scenarios with different projections. Finally, we present a scenario for the Norwegian economy as a result of Covid-19 and infection-reducing measures.

The analyzes here are based on an input-output model. A presentation of how such a model is made and can be used for analysis is presented in an appendix