Brace for impact 

Abhijit Mukhopadhyay is a Senior Fellow (Economy and Growth) at the Observer Research Foundation, New Delhi A decelerating world economy toppled by COVID-19 In January 2020 the International Monetary Fund (IMF) World Economic Outlook Report projected global growth to rise from an estimated 2.9% in 2019 to 3.3% in 2020, and subsequently to 3.4% in 2021. This was done after a downward revision of 0.1 percentage point for 2019 and 2020, and 0.2 percentage point for 2021 to its projected figures of growth in the October Outlook. The downward revision has been done due to negative reports of growth in a few emerging economies, including India – apart from trade tensions existing worldwide. The January Outlook also recognised tentative positive signs of manufacturing and global trade bottoming out, favourable outcome of US-China trade negotiations, and diminished signs of a no-deal Brexit1. Before these IMF growth projections came out, by the end of December 2019 in the Chinese city of Wuhan a strange flu suddenly appeared – reportedly all initial affected patients were somehow related to a ‘wet market’ in the city. The Chinese administration, in its usual denying reflex action, immediately tried to hush up these happenings, only to wake up to the enormity of the threat later. The disease has turned out to be a novel strain of coronavirus or COVID-19. More than 156,700 cases have been confirmed since the outbreak and the number of deaths has risen to 5,800 across 114 countries and is increasing every day2. The spread is now across the continents, and the scenario in countries like Italy, Iran and the USA – outside China – is quite threatening. The intercontinental nature of this rapid spread of the virus has finally prompted World Health Organization (WHO) to declare COVID-19 as a pandemic on 11 March 20203. UNCTAD envisioned a probable global economy output loss of $1 trillion, compared to the forecast made in September 2019. Another extreme ‘Doomsday scenario’ involves a 0.5% growth in world economy, and that would imply a clear $2 trillion hit in 20204. Even at the beginning of February a few have been hoping for a contained global scenario for this outbreak. However, the current situation has made it amply clear that a contained scenario is out of question. Different countries of the world are trying to cope with different measures of ‘social distancing’ via lockdown, restricted movements and various methods of mitigation. In short, these imply a serious disruption in trading, economic and business activities everywhere in the world. The shock will surely be felt in global economic growth as well. The big question now is – how much economic disruption will there be? A broader COVID-19 contagion and rampant disruption likely The OECD Interim Report this month on COVID-19 classifies possible scenarios in two future categories – baseline and a domino scenario. As news of a greater number of cases and deaths are pouring in, it looks like the world is definitely heading towards a domino scenario, where global economy might even take the entire next year to recover. Global trade remained weak even before the COVID-19 outbreak (Figure 1). As a result, standard indicators like container port traffic, air freight traffic and air passenger traffic dipped significantly in 2019. GDP and trade projections for the US, China and the world have been worse earlier, but improved significantly after Phase One agreement between the US and China, with the hope that situation may improve in 2020 (Panel B of Figure 1). However, the worldwide spread of coronavirus changes everything now. As trade weakened, global GDP growth also lost its momentum – particularly after 2017. Four advanced economic zones (Australia, Eurozone, Japan, the UK and the US) experienced a deepening fall in their Purchasing Managers’ Index, signifying acute slowdown after 2017 (Figure 2). Panel B shows the absolute dip in both new manufacturing and services orders since middle of 2017. The fall in orders accelerated further in 2019 before showing slight marginal turnaround in the end of the year. So, the overall economic, business and trade dynamics were already in the red zone for the last two years or so. The COVID-19 outbreak could not have arrived at a more inopportune moment for the global economy. How bad the will be the effect on the world economy? The OECD Report5 created the domino scenario (broader contagion) assuming the countries affected by COVID-19 would represent over 70% of global GDP (in PPP terms). Key additional shocks considered in this scenario include: Domestic demand in most other Asia-Pacific economies, including Japan and Korea, and private consumption in the advanced northern hemisphere economies reduced by 2% (relative to baseline) in the second and third quarters of 2020. Global equity prices and non-food commodity prices lowered by 20% in the first nine months of 2020. Heightened uncertainty modelled via an increase of 50 basis points in investment risk premia in all countries in 2020. In that kind of a broader contagion, economic impact would be severe in all major regions and country groupings (Figure 3). China, the epicentre of the outbreak, would be hit the most for obvious reasons, but other Asia-Pacific countries would be impacted as badly – the dip in their GDP may be 1.6% or more. The G-20 would be the next, followed by North America, other major commodity exporter countries and Europe. Negative impact on the world GDP can be 1.5% or more in this scenario. Stock markets across the world crashed in March after the WHO declared the spread of coronavirus an emergency (and subsequently a pandemic) (Figure 4). Major world stock market indices like the Dow Jones, Nikkei and FTSE 100 all crashed through the month of March. However, the glaring anomaly in the overall trend comes from China. While elsewhere in the world (including the USA and the Europe) the virus is spreading rapidly, China is trying to get back to work after somehow dealing with the initial jolt of the outbreak. Factories and restaurants are re-opening their doors, and the investors are looking into a probable big stimulus package from the Chinese government. And the result is – China is currently the best performing stock market in the world, though six weeks ago from the present time it was the worst6. Global economic disruption will follow the Chinese pattern Figure 5 shows China’s current integration in global value chains across sectors, measured by the Grubel-Llyod Index (GLI). The importance of Chinese manufacturing in many global value chains is an axiomatic truth in today’s world. As the figure shows, it is particularly pivotal in precision instruments, machinery, automotive and communication equipment value chains – among others. In simple words, any significant disruption in China in these value chains will affect producers in the rest of the world. Restrictive measures to contain COVID-19 would definitely disrupt and negatively affect the output of producers elsewhere in the world. The slowdown pattern elsewhere in the world is also likely to be similar to China’s slowdown. Another important point to be noted here is that even where the global value chain integration of China is relatively smaller, there are sectors dominated by the Chinese producers. One example can be textiles and apparel sector – it has relatively less value of global value chain integration, but the fact is that China is one of the major producers of textiles products. Less value chain integration actually means that Chinese textile is self-sufficient and production process is end-to-end – from raw material to finished textile products. Satellite images acquired from various sources, including NASA, show drastic fall in the level of pollution in China – specifically around affected Wuhan city and other major Chinese cities like Beijing, Shanghai and Hong Kong (Figure 6). Nitrogen dioxide level in the lower atmosphere, as can be seen, almost vanished in the month of February, compared to January 2020 level. This demonstrates the effect of slightly delayed lockdown the Chinese government imposed. But the enormity of the shutdown can be realised if the vanishing of nitrogen dioxide just in a month is considered. Being the manufacturing powerhouse of the world, the sheer scale of such industrial shutdown in China is bound to create tremors in other manufacturing hubs of the world. Among the hardest hit sectors, primary is travel. Restrictions imposed at different countries are likely to reduce the number of international travellers drastically. Change in bookings of Chinese travellers across continents show drastic drops (Figure 7). For example, there have been 415,000 visits from China to the UK in the preceding 12 months to September 2019. Chinese travellers spend three times more than an average tourist to the UK at £1,680. A fall in the number of tourists would obviously impact the airline, hospitality and other associated industries. As mentioned earlier, the world economy has been experiencing a slowdown in demand, and China was no exception. Car sales growth going into the negative in 2019 is one indicator of that. However, the most alarming aspect is that after the coronavirus outbreak in the first two weeks of February 2020 Chinese car sales dropped by a whopping -92% (Figure 8). More upper-end carmakers, like Tesla or Geely, are now selling cars online as customers generally are staying away from the showrooms. Restaurants and other shops related recreation, shopping malls, movie business are also among other sectors which are immediately and badly hit. Conclusion To stop any epidemic (in this case, a larger historic pandemic) economic costs have to be paid. There is not much of a choice. However, the already existing slowdown across global economy has made the situation worse. The governments of different countries across the world have their immediate job cut out – the foremost being protecting the health and income of the most vulnerable sections. In China, the poorest are paying the steepest price of this outbreak – in terms of death, health hazard and economic survival. A pandemic of this scale also needs internationally coordinated actions across countries and continents. Once these short-term humanitarian goals are achieved, only then longer-term policy actions to boost economic recovery will come. Unfortunately, current tidings from different corners of the world belies these concerns – both short-term and long-term. This outbreak has exposed the limitations of the existing models of healthcare followed in most of the countries. Even in macroeconomic terms, all these will translate into economic damages of epic proportions. Instead of closing our eyes to that stark reality, it is better to brace for that impact, and bring humanitarian, societal and economic recoveries firmly into the agenda of a post-pandemic world. Endnotes 1. IMF (2020), “World Economic Outlook Update”, 20 January 2. The Telegraph (2020), “What is coronavirus, how did it start and could the outbreak grow bigger?”, 15 March, available at 3. WHO (2020), “Director-General’s opening remarks at the briefing on COVID-19”, 11 March, available at 4. UN News (2020), “Coronavirus update: COVID-19 likely to cost economy $1 trillion during 2020, says UN trade agency”, 9 March, available at 5. OECD (2020), “Interim Economic Assessment – Coronavirus: The world economy at risk”, 2 March, available at 6. The Economist (2020), “Daily Chart: Control of the coronavirus gives China the world’s best-performing stockmarket”, 14 March, available at 7. BBC News (2020), “Coronavirus: Eight charts on how it has shaken economies”, 6 March, available at 8. UNCTAD (2020), “Technical Note: Global trade impact of the Coronavirus (COVID-19) Epidemic”, 4 March, available at 9. BBC News (2020), op. cit. 10. BBC News (2020), Ibid

Table 1. Impact of COVID-19 on global economy: two possible scenarios

Source: OECD Economic Outlook, Interim Report, March 2020 A pandemic of this scale also needs internationally coordinated actions across countries and continents