COVID-19 Circular Flow of Income: How Retrenchment is Happening

News nowadays has reported lots of loss of employment. According to latest news earlier today, Air Asia planned to lay off more than 250 staff members from their disposal.

Certainly this time of recession and couple with low demand for oil has made it worst for our economy. To date, most of businesses experiencing a halt as most countries implementing lockdowns.

Not long ago, a Norwegian company Aker Solutions was the 1st who made the headlines in oil & gas sector in Malaysia. They have reduced its staff members to become competitive in the subsea market.

They are consolidating the subsea tree production to Brazil and Malaysia from Tranby. Tranby will no longer produce subsea trees after 2020. This will effectively removing market capacity of about 60 subsea tree equivalents per year.

2 million job losses in 2020

The figures stands at around 2,000,000 job losses in Malaysia. Based on the information given by the Malaysian Employers Federation as well as Malaysian Institute of Economic Research.

According to recent report by the PERKESO, job losses increased by 42% year on year in the 1st quarter of 2020. This trend is consistent with the assumption.

Acceleration is expected to start from April 2020 onwards. Job losses set to increase by 50% to 200% year on year for each subsequent quarter in 2020.

LOE numbers are projected to increase by 799 each day based on extrapolated figures from the EIS database.
LOE numbers are projected to increase by 799 each day based on extrapolated figures from the EIS database.

2020 is going to be a bad year

Comparing GDP growth to retrenchment figures and the unemployment rate.
Comparing GDP growth to retrenchment figures and the unemployment rate.

For an example, in 1997 during Asian Financial Crisis unemployment rate hit to 3.2%. In addition, in 2018 during The Great Recession the unemployment rate hit to 3.7%.

Based on these past events, we can see that unemployment rate is going to hit 4% this year. Clearly this retrenchment figures are expected to be similar to those in 1997.

How this is happening?

In a layment terms, households own the capital and labour. In which they sell it to the businesses. By working in a business (factory). This factory is then using labours and start producing goods.

Consequently, the goods is then bought by households with the money they received from the factory. Thereby completing the circuit and keeping the economy ticking over. 

Circular flow of income

The key point is that the economy will continues to run only when the money is keeps flowing around the circuit. Roughly speaking, a flow disruption anywhere on this curcuit will causes a slowdown everywhere.

Circular flow of income

Source:

  1. Keeping the lights on: Economic medicine for a medical shock

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