Macroeconomic lockdown and SMEs: The impact of the COVID-19 pandemic in Spain

Thursday, 27 May 2021

“The relative importance of small and medium-sized enterprises (SMEs) and large firms is a recurrent topic in the small business economics literature. This research presents a real and financial social accounting matrix (FSAM) with 63 activities that have been disaggregated by firm size: micro, small, medium, and large. Our approach makes two main contributions to the knowledge frontier in the existing academic frameworks of small business economics and the granular origins of aggregate fluctuations. First, we quantify the economic activity impact originating through different firm-size categories in the context of the COVID-19 pandemic. In doing so we demonstrate the feasibility of maintaining a consistent macroeconomic accounting framework which connects shocks in SMEs and large firms and their aggregated levels effects. Our approach also makes a contribution in the mainstream academic analyses of the micro foundations of macroeconomic fluctuations (that is, standard business cycle theory, with micro-features, and the granular origins of aggregate fluctuations). Considering the hypothetical extraction method (HEM) according to the proposal by Dietzenbacher et al. (2019), we can determine the relative importance of SMEs in sustaining economic activity and employment throughout the economic cycle, and, in particular, during the recession caused by COVID-19. Dealing with theoretical structures that consider the links between shocks at the idiosyncratic level and their aggregate impact, it is possible to measure not only sectoral problems and those issues related to the labor market or economic growth, but also the relative importance of SMEs in the overall results. These results allow us to reconcile the mixed narrative that accompanies the evaluation of the role played by these categories in economic activity. In order to account for the relative effects on SMEs, however, it is important to consider the specific sector that receives the disruption. The decline in SMEs due to the effect of the COVID-19 pandemic accounted for some 43% of the total decline in activity observed up to July 2020. SMEs were also responsible for two-thirds of the fall in employment. Thus, while the maintenance of economic activity shows greater sensitivity to the behavior of large firms, employment depends substantially on SMEs in general, and micro-enterprises in particular. The empirical findings suggest that the proposed model reasonably quantifies the effects of the COVID-19 lockdown on economic activity.”