Economics in the Time of COVID-19
trade, 9% of global tourism and over 40% of global demand for some commodities,
negative spillovers to the rest of the world are sizeable. This affects primarily China,
but also other countries’ supply and demand as well.
In our best-case scenario, most of the slowdown in activity comes from the contraction
of demand in China. We have modelled the global impact of this contraction, including
uncertainty effects and the impact on equity prices and commodity prices, and used it
as a guide for the updated growth projections in the March OECD Interim Economic
Outlook. The impact of the coronavirus outbreak, and the measures used to contain
its spread, is akin to an adverse supply-side shock, with an enforced decline in the
number of hours worked. However, the effects are mirrored in weaker demand. A
decline in confidence, foregone income for laid-off workers, and lower demand for
travel and tourism services all hit consumer spending; a reduction in cash-flow and
higher uncertainty delay corporate investment; and existing inventory levels are run
down due to the disruption of supply chains.
In this best-case scenario, overall, the level of world GDP is reduced by up to 0.75% at
the peak of the shock, with the full year impact on global GDP growth in 2020 being
around half a percentage point. Most of this decline stems from the effects of the initial
reduction in demand in China. Global trade is significantly affected, declining by 1.4%
in the first half of 2020 and by 0.9% in the year as a whole.
The impact on the rest of the world depends on the strength of cross-border linkages
with China. In the near term, the adverse effects on GDP are relatively strong in Japan,
Korea, other smaller economies in East and South-East Asia, and commodity exporters.
All of these economies are significantly exposed to China via strong supply-chain
linkages and tourism and other travel-related services.
The net effects of the combined shocks are deflationary, with consumer price inflation
pushed down by around a quarter of a percentage point in 2020 in the OECD economies
and by a little more in non-OECD economies.
We are obviously cautious in that this analysis cannot pick up the full extent of possible
sharp discontinuities that might arise from the impact of the virus in China. These
include possible supply-chain disruptions (particularly if alternative sources of supply
are scarce) or the complete stop of cross-border travel into some locations. Such factors
may change the impact of the virus outbreak over time and across regions.