What Coronavirus Implies for the Global Economy

In January 2020, the IMF projected that global growth would rise from 2.9% in 2019 to 3.3% in 2020. However, the fast spread of COVID-19 in February 2020 has sparked concerns about a global recession in 2020. How bad might the COVID-19 recession be and what should be done are the key policy questions today.  

From health emergency to global economic shock?

The world economy was fragile even before COVID-19. The trade war between the US and China, coupled with rising geopolitical tensions, had taken a toll on global trade which had hitherto driven globalization. China, the world’s factory, was seeing a hollowing out of manufacturing and off-shoring of manufacturing production in the wake of the trade war and rising wages. Europe was hampered by uncertainties in the Brexit process and weak business investment. Japan, at the frontier of a super aging population and a consumption tax hike, was confronting sluggish growth. All of these were happening when India was slowing with distress in rural areas, weighed down by the lingering effects of demonetarization and the general sales tax. Other developing economies saw capital outflows amidst rising debt levels. 

Then came the unexpected global spread of COVID-19 - a rapidly-moving highly contagious infection originating in China. The pandemic has so far affected 146 countries, infecting over 531, 860 people and causing more than 24,056 deaths (27 March 2020). The rapid transmission of the disease is linked to globalization of the world economy and the advent of global travel between airports. It is putting an enormous strain on health care systems and disaster risk management. 

The COVID-19 is not just a public health emergency but it is also a disruptive economic shock. It has tumbled stock markets and caused volatile capital flows. It has disturbed global supply chains, forcing multinational companies to close factories and hit global trade. Lockdowns and travel restrictions are halting people movement. Business confidence and daily life have altered. Unemployment and income inequality are rising. 

Coronavirus Recession Scenarios

It is still too early to assess the full economic impact of COVID-19. Data is inadequate and existing forecasting models are not adequately specified to analyze the disruption from the pandemic. But there is a consensus among economists that global growth in 2020 will be less than 2019. Our work suggests two possible scenarios with the depth of economic downturn depending on the effectiveness in containing the pandemic: 

Scenario 1: a short outbreak and a limited global economic impact. The global spread of COVID-19 is checked within a few months through virus testing, social distancing, quarantine and medical treatment. Ultimately, a vaccine is successfully developed and made available. Under scenario 1, global growth in 2020 may be in the range of 2.3-2.5% and an upturn may occur in 2021. Nonetheless, this scenario will fall within the practical definition of a recession as two consecutive quarters of fall in a country's real gross domestic product (GDP). 

Scenario 2: A long outbreak and a prolonged global economic impact. COVID-19 continues to spread rapidly internationally, the measures are partially successful in containing the disease and it takes longer than expected to develop a vaccine. Under scenario 2, global growth in 2020 could slip to a range of 1.0-1.5% and remain subdued in 2021. This would constitute a lengthy recession. 

Policy implications

A coordinated global response, backed by national efforts, is crucial to tackle the pandemic. Addressing public health needs is the first priority. The 70-year old by the World Health Organization (WHO) has been slow to reform itself and faced funding cuts. But, as the only global health agency in the UN system, it urgently needs increased financial resources to support economies engulfed by COVID-19 and modernization of the institution over time. 

With a severe downturn likely, a complementary priority is for economies to spend significant sums to protect vulnerable households. They should also prepare fiscal measures including transfers and backstops to financial institutions. The Trump Administration and the US Congress agreed on large economic stimulus package while The US Federal Reserve has cut interest rates back to zero. The European Central Bank introduced a modest stimulus package including new cheap loans to banks but did not cut interest rates. These efforts are laudable but below the spending levels and close international coordinated action undertaken to tackle the 2008 global financial crisis. 
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.