Coronavirus: impact on the global economy deteriorating

Capital Economics has revised its global GDP growth forecasts for 2020 downwards for the second time: from 2.9%, to 2.4% and now to 2.0%, citing five considerations: i) disruption caused by containment measures imposed by governments, ii) the response of individuals (particularly with respect to self-isolation), iii) dislocation in financial markets, iv) spill-overs from virus-related downturns in trading partners, and v) the response by policymakers. 

Ever the optimistic forecaster, Capital Economics said as the virus fades, containment measures are lifted and policy easing gains traction, global GDP growth should recover over the second half of this year and rebound to around 3.5% in 2021.

Nicholas Brooks, head of economic and investment research at IWG, cited three discernible ways in which coronavirus is influencing market sentiment: global supply chains reliant on key manufacturing inputs in China and other manufacturing hubs affected by the virus; Chinese consumer and investment demand; and consumer impact and investment demand outside China.

IWG’s Nicholas Brooks explains:

“The biggest initial impact of the outbreak of Covid-19 is on China (and to a lesser extent other Asia) production and the knock-on effects on global supply chains. The longer it takes for China and the rest of Asia to get back to full capacity, the larger the global disruption will be.

“High frequency data indicates China consumer and investment demand fell sharply in the first two months of 2020 and the weakness is likely to linger into the latter part of the year until stepped up government and central bank stimulus starts to feed through the economy and consumer confidence returns.

“The depth and duration of the Covid-19 outbreak hit to global growth outside of China will depend very much on how long-lived government containment measures are and how the public reacts to the spread of the disease. So far, in most of the world’s major economic centres outside of Asia the public reaction has been mild, with limited visible impact on activity. However, this could change quickly if there is a large increase in new cases in these centres.”

“During the Swine Flu pandemic of 2009/10, new global cases peaked around eight months after the outbreak and the WHO announced the pandemic over around 16 months after the initial case (it was declared a pandemic about two months after the first confirmed case). It is too early to assess how Covid-19 will evolve given the virus is still not fully understood. However, if it follows a similar pattern to the Swine Flu, cases might be expected to peak in late summer/early autumn.”

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