Coronavirus: what we expect for global growth
The coronavirus epidemic represents a severe threat to global growth. Prior to the outbreak we expected global real GDP growth to be lacklustre this year, at 2.3% (at market exchange rates). The emergence of the epidemic in China is a game changer, and we now expect global growth of 1.9% this year—the slowest rate since the global financial crisis. The negative effect on growth will come via both demand and supply channels. On the one hand, quarantine measures, illness, and negative consumer and business sentiment will suppress demand. At the same time, the closure of some factories and disruption to supply chains will create supply bottlenecks.
Policymakers face difficult choices
There was hope initially that the coronavirus outbreak would remain contained in China. However, the recent spread to other countries means that the virus is likely to affect between 25% and 70% of the world population. Policymakers have difficult choices to make: they must decide whether they prefer that the epidemic run its natural course and peak quickly, or that it be spread over a longer period if quarantine measures are introduced. If the epidemic reaches its peak sooner, the death toll will be higher—all the more so as the flu season will not yet be over and healthcare systems will quickly become overwhelmed. However, in this case the economic impact of the epidemic would be less severe, as containment measures would be lifted earlier. Conversely, a longer epidemic would probably lower the death toll, but exact a higher economic cost.
The symptoms are mild for most people, but this might not be good news
The fact that the disease has a low fatality rate, and its symptoms are mild for about 80% of people, represents another challenge: it means that the coronavirus spreads easily, as sick people think that they merely have a minor cold, do not get tested and unknowingly contaminate others. At the other end of the spectrum, about 20% of people affected by the coronavirus will experience pneumonia, which represents the severe form of the disease and often requires intensive medical care. After they recover from the infection, they could continue to suffer from extreme fatigue for up to six months. This means that a significant share of the world population will become less productive for an extended period of time.
Monetary stimulus: how to go below zero
In early March the Federal Reserve (Fed, the US central bank) announced an emergency interest-rate cut in response to the economic threat posed by the coronavirus. This is the first emergency cut and the largest single rate cut that the Fed has made since the global financial crisis in 2008, raising expectations that other central banks such as the European Central Bank (ECB) and the Bank of Japan might follow suit. However, both these institutions will be greatly constrained in their response to the coronavirus outbreak, as their headline interest rates are already below zero. The only realistic course of action for the ECB would be to ease further lending conditions for banks under its targeted longer-term refinancing operations programme (TLTRO-III), or to offer a programme for small and medium-sized enterprises (which are hit hard by the coronavirus).
Fiscal stimulus: not before doomsday
Monetary policy constraints, and the difficulties of shaping a co-ordinated monetary response at the global level, mean that fiscal stimulus might be the only option for many developed countries to support growth. However, this is not given. In Europe, a co-ordinated fiscal stimulus appears unlikely, not least because Germany remains reluctant to abandon its balanced budget rule, despite calls to do so from other countries. In addition, the introduction of fiscal stimulus measures in Italy, which is hard hit by the coronavirus, would further worsen the country’s public finances and increase the medium-term risk of a financial crisis. Meanwhile Japan’s public debt already stands at almost 230% of GDP, the highest ratio in the world; it is hard to imagine that it could go much higher without becoming a systemic threat to the global economy, all the more so if global growth slows sharply. Finally, in many other highly indebted developing countries, fiscal stimulus would only raise the risk of a debt crisis down the road.
The US appears more shielded than other countries
The US economy is less trade-reliant than some other countries, such as Japan or Germany, which will help to shield it from slowing external demand. Nonetheless, if the virus spreads quickly in the US, this could weigh on corporate earnings, to the extent that job creation and unemployment in the US would be negatively affected. This would hit consumer spending—the only source of buoyant growth in the US economy—and spook financial markets, increasing the risk of a crash that would quickly spread to other financial markets around the world.
Europe’s growth outlook darkens
The recent spread of the coronavirus in Europe—where there has been a rapid increase in the number of reported cases in major economies such as Italy, Spain, France and Germany—and the containment measures taken in response will constrain growth in the bloc in the second quarter. We expect economic uncertainty to persist until at least June, dampening business sentiment, household consumption of non-essential goods, and travel and tourism activity. Quarantine measures and public distancing efforts will become widespread, but we expect euro zone borders to remain open. In the third quarter of the year we expect a bounce-back in activity, but there is a significant risk that uncertainty will persist for longer, with a commensurate negative effect on demand.
Asia will be the region hardest hit
The coronavirus outbreak will affect every economy in Asia in 2020. China has, so far, registered the highest number of cases, and we believe that real GDP growth will stand at only 4.5% this year (from an estimated 6.1% in 2019). Some economies, such as South Korea and Japan, have also registered a large number of cases, and containment measures will hold back growth, especially as Chinese import demand falls. There are two main channels through which Asian economies are likely to be affected by the outbreak. The first is weaker tourism inflows, primarily from China; economies with large tourism sectors that attract a high proportion of Chinese tourists include Hong Kong, Taiwan, Thailand, South Korea, Singapore, Malaysia and Sri Lanka. The second transmission mechanism is through disruption to industrial supply chains. The economies with the greatest exposure to this factor are Hong Kong, Taiwan, South Korea, the Philippines and Thailand.
Even weaker growth ahead in Latin America
For Latin America and the Caribbean, the impact of the coronavirus will vary according to a country’s reliance on trade and commodities. For South America’s large commodity exporters, the shock from reduced global demand, especially from major trade partners such as China and the EU, and from weak prices of oil, copper, iron ore and soybeans, will be severe. The more open, trade-reliant economies of Chile and Peru will be especially hard hit. Mexico, Central America and the Caribbean are more closely reliant on trends in the US, and our expectation that US GDP growth will remain positive will provide some support. For the Southern Cone countries, the approach of the southern hemisphere winter raises the prospect of a difficult, prolonged coronavirus epidemic. Moreover, the policy response will be complicated by generally weak fiscal positions. This will place the onus on monetary policy to support growth.
The Middle East and Africa: not fit to cope
The coronavirus outbreak will hit the Middle East and Africa largely through its dampening effect on the oil and commodities markets. China accounts for about a third of new oil consumption demand, so the slowdown in China has caused oil prices to fall. Lower oil output and prices will weigh on economic performance in the oil-exporting states and the broader region. Countries that rely on platinum exports, a major component in the automotive sector, and those that depend on China’s outward investments will be hard hit. Given increased travel restrictions for some countries, regional tourist destinations such as the UAE, South Africa, Kenya, Mauritius, Oman and Egypt will also be negatively affected. The UAE’s status as a shipping hub and Dubai’s deep commercial ties with Iran, which has been heavily affected by the outbreak, make them vulnerable. Abysmal healthcare systems in many African countries mean that it would be near impossible to contain an outbreak there