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Spread of virus risks sustained and significant disruption

Ben May


With the coronavirus outbreak continuing to escalate in scope and impact, we have lowered our global growth forecast to just 2% for 2020 - 0.5 percentage points below our January projections, before the outbreak began.

The return to business as usual in China has been slower than we expected, while the spread of the coronavirus and associated disruption elsewhere has broadened.

Globally, the situation remains fluid. A key uncertainty is the extent to which households and firms are able and willing to go about their normal business. Our latest forecast assumes that in Q2 global growth bounces back led by China, and that over the quarter disruption eases.

But with COVID-19 cases rising in multiple hotspots outside China and markets in retreat, we see a major risk of sustained and significant disruption being exacerbated by tighter credit conditions. A global recession may not yet be an inevitable consequence of the coronavirus outbreak, but even a modest surge in bad news could make it our baseline view.

At face value, the plunge in the global composite PMI from 52.2 to 46.1 leaves the global economy in recession territory. But as we have previously argued, surveys have often overstated the likely scale of global slowdowns after major one-off events. We have few instances of prior shocks comparable to this, so the scale of the near-term slowdown and a subsequent rebound are highly unpredictable.

From an economic perspective, the key issue is not just the number of cases of COVID-19, but the level of disruption to economies from containment measures.

Widespread lockdowns have been enacted in some virus hotspots, while 12 economies have also adopted national school closures. These will have knock-on effects if some working parents have to stay at home.

Similarly, the virus has triggered a collapse in non-essential travel.

Pre-emptive action to contain the virus may ultimately reduce the economic costs of the virus if it prevents a pandemic.

But there will be trade-offs. Disproportionate action will weaken economic activity and potentially induce panic, increasing the chances of investment and consumer spending being delayed or scrapped.

Many economies have provided monetary and fiscal support. While welcome initiatives, these will most likely only reduce the adverse knock-on effects of near-term losses in wages and income.

Belfast Telegraph