In the “Coronavirus: The World Economy at Risk” economic outlook report issued Monday, the Organization for Economic Cooperation & Development noted that at the same time that COVID-19 is spreading from China to other regions and causing human suffering and economic disruption, it is also raising the risk of wider restrictions on the movement of people, goods and services, while dampening consumer confidence and slowing production.
“The virus risks giving a further blow to a global economy that was already weakened by trade and political tensions,” Laurence Boone, OECD chief economist, said in presenting the report in Paris. “Governments need to act immediately to contain the epidemic, support the health care system, protect people, shore up demand and provide a financial lifeline to households and businesses that are most affected.”
The adverse impact on confidence, financial markets, the travel sector and disruption to supply chains will contribute to downward revisions in all G20 economies in 2020, particularly ones strongly interconnected to China, such as Japan, South Korea and Australia. OECD said even in the best-case scenario of limited outbreaks in countries outside China, a sharp slowdown in world growth is expected in the first half of 2020 as supply chains and commodities are impacted, tourism declines and confidence falters.
Global economic growth is seen falling to 2.4 percent for the year, compared to an already weak 2.9 percent in 2019. It is then expected to rise to a modest 3.3 percent in 2021.
Compared to episodes in the past, such as the SARS outbreak in 2003, the global economy has become substantially more interconnected, and China plays a far greater role in global output, trade, tourism and commodity markets, the report noted. This magnifies the economic spillovers to other countries from an adverse shock in China.
Growth prospects for China have been revised down sharply to below 5 percent this year after 6.1 percent in 2019, OECD said. But a worst-case scenario, with a broader contagion across the wider Asia-Pacific region and advanced economies in Europe and North America, could slash global growth to as low as 1.5 percent this year, halving OECD’s previous 2020 projection from November.
“Containment measures and loss of confidence would hit production and spending and drive some countries into recession, including Japan and the Euro area,” the report said.
Even if the peak of the outbreak proves short-lived, with a gradual recovery in output and demand over the next few months, the epidemic will still exert a substantial drag on global growth in 2020, OECD said. In addition, downside risks such as trade and investment tensions remain high and could spread further.
“The prospects for a further trade deal between the U.S. and China that would remove all the remaining tariffs put in place over the last two years are uncertain,” the report said. “In addition, other bilateral trade tensions could also still spread, notably between the U.S. and Europe. Failure to achieve a prompt resolution to the current disruption to WTO dispute settlement procedures would also add to global trade policy uncertainty.”
In the most affected countries, adequate liquidity should be provided to allow banks to help companies with cash-flow problems while containment measures are in force, OECD recommended. If the epidemic spreads widely, the G20 economies should lead an internationally coordinated framework for health care support, combined with fiscal and monetary stimulus to rebuild confidence, the report added.