Economics in the Time of COVID-19
Overall, the level of world GDP is reduced by up to 1.75% (relative to baseline) at the
peak of the shock in the latter half of 2020, with the full year impact on global GDP
growth in 2020 being close to 1.5%. Initially, the adverse impact is concentrated in
China, but the effects in the rest of Asia, Europe and North America gradually build up
through 2020. The major part of the decline in GDP again stems from the direct effects
of the reduction in demand, but the impact of heightened uncertainty accumulates
gradually. World trade is substantially weaker, declining by around 3.75% in 2020,
hitting exports in all economies.
The deflationary effects of the combined shocks are considerably larger than in the best-
case scenario, with consumer price inflation pushed down by around 0.6 percentage
points in 2020 in the OECD economies.
Policy recommendations
Economic policy choices have an important bearing on cushioning the implications of
containment measures and the speed at which the economy can adjust towards more
normal conditions after the virus outbreak.
Increased government spending should be first directed at the health sector,
supporting all necessary spending on prevention, containment and mitigation of the
virus, including higher overtime pay and better working environment conditions, as
well as research.
Supporting vulnerable households and firms is essential.
Containment measures and the fear of infection can cause sudden stops in economic
activity. Beyond health, the priority should be on people. Options include using
short-time working schemes and providing vulnerable households with temporary
direct transfers to tide them over the loss of income from work shutdowns and layoffs.
Increasing liquidity buffers to firms in affected sectors is also necessary to avoid debt
default by otherwise sound enterprises. Reducing fixed charges and taxes and credit
forbearance would also help to ease the pressure on firms facing an abrupt falloff in
demand.
If the epidemic spreads outside China, the G20 should lead a coordinated policy
response.