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Tackling the fallout from COVID-19

Laurence Boone

There are supply, demand, and confidence channels through which the virus affects the
economy.

The arrival of the virus triggered containment measures, which are having a large
economic impact. These measures include wide-ranging restrictions on passenger
transportation and labour mobility, which especially affect the tourism and travel
industry and the entertainment and leisure sector, as well as plant closures or reduced
activity, spilling into global supply chains.

We can identify three main channels through which these measures spill over globally:

• Supply: significant disruptions in the global supply chain, factory closures, cutbacks
  in many service sector activities;


• Demand: a decline in business travel and tourism, declines in education services, a
  decline in entertainment and leisure services;


• Confidence: uncertainty leading to reduced or delayed consumption of goods and
  services, delayed or foregone investment.

The epidemic, via containment measures and the transmission channels, has sharply
slowed manufacturing and domestic consumption in China and in its economic partners.
In other countries, outbreaks that are more recent are also prompting containment
measures. All this is severely affecting consumer and financial market confidence.

Two scenarios provide a range of possible outcomes

As the epidemic situation is evolving by the day, it is even more difficult than usual to
project the economic outlook. This is why we focus on best-case and downside-risk
scenarios in order to offer an interval of possible outcomes and policy proposals to
soften the economic implications of the virus.

Best-case scenario

In a first best-case scenario, the epidemic stays contained mostly in China with limited
clusters elsewhere.

This would still affect global growth, which has been cooling for the past two years,
bringing it to a subdued level. High-frequency indicators such as coal demand, air
pollution, car sales and business surveys suggest the Chinese economy slowed sharply
in the first quarter of 2020. As China accounts for 17% of global GDP, 11% of world