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The OECD released an Interim Economic Assessment of the Coronavirus risk and its impact on the world economy on 2nd March.

Following is a summary of the report:

The Coronavirus (COVID- 19)   has brought adverse consequences through disruption to global supply chains, weaker demand for imported goods and services and declines in international tourism and business travel.

Since the outbreak in January, close to 85,000 people have been infected worldwide, with a fast-rising share of these outside China. The epicentre of the outbreak was in Hubei province, which accounts for about 4.5% of China’s output, but the effects have been quickly apparent throughout China with efforts to control the spread of the virus leading to wide-ranging restrictions on passenger transportation, labour mobility and hours worked.

China’s role in global activity and commodity markets

As compared to similar 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 (Figure 1).

China accounts for a rising share of the global activity and also accounts for a large share of the global commodities trade. Even with a gradual recovery in output and demand over the next few months, it will still exert a substantial drag on global growth in 2020.

Production declines in China have been quickly felt by businesses around the world, given China’s key role in global supply chains as a producer of intermediate goods, particularly in computers, electronics, pharmaceuticals and transport equipment, and as the primary source of demand for many commodities.

Temporary supply disruptions can be met by using inventories, but inventory levels are lean due to just-in-time manufacturing processes and alternative suppliers cannot easily be obtained for specialised parts.

A prolonged delay in restoring full production in affected regions would add to the weakness in manufacturing sectors in many countries, given the time it takes to ship supplies around the world.

Adverse impact on tourism

Travel restrictions, and the cancellation of many planned visits, flights, business and leisure events are severely affecting many service sectors. This is likely to persist for some time.

Worldwide, Chinese tourists account for around one-tenth of all cross-border visitors, and one-quarter or more of all visitors in Japan, Korea and some smaller Asian economies (Figure 4, Panel A).

Exports of travel services to China, including the spending by Chinese visitors, are also significant in many countries (Figure 4, Panel B). The virtual cessation of outbound tourism from China represents a sizeable near-term adverse demand shock. This is already apparent in many destinations; visitor arrivals in Hong Kong, China in February were 95% lower than usual.

If the spread of the coronavirus outbreak affects visitor numbers more widely across the major economies, there would be sizeable costs, with tourism accounting directly for 4¼ per cent of GDP in the OECD economies and almost 7% of employment.

 

 

Global growth is set to weaken this year and recover gradually in 2021

The projections are based on the assumption that the epidemic peaks in China in the first quarter of 2020, with a gradual recovery through the second quarter aided by significant domestic policy easing. Together with the recent marked deterioration in global financial conditions and heightened uncertainty, this will depress global GDP growth in the early part of the year, possibly even pushing it below zero in the first quarter of 2020.

Targeted measures proposed

  • Additional fiscal support for health services is required, including sufficient resources to ensure adequate staffing and testing facilities, and all necessary prevention, containment and mitigation measures.
  • Short-time working schemes, where available, can be utilised to enhance the flexibility of working hours whilst preserving jobs and take-home pay.
  • Governments can also help households by providing temporary assistance, such as cash transfers or unemployment insurance, for workers placed on unpaid leave, and by guaranteeing to cover virus-related health costs for all, retrospectively if needed.
  • In the very short term, the provision of adequate liquidity in the financial system is also a key policy, allowing banks to provide help to companies with cash-flow problems, particularly small and medium-sized enterprises, and ensuring that otherwise solvent firms do not go bankrupt whilst containment measures are in force.
  • Measures that reduce or delay tax or debt payments, or lower the costs of inputs such as energy, for firms in the most affected regions and sectors should be considered.
  • Targeted and temporary fiscal measures could also be implemented to support businesses in sectors particularly exposed to a sharp downturn in travel and tourism.
  • Funds established to reintegrate workers who have lost their jobs due to globalisation could also be utilised.

 

Source: www.oecd.org/economic-outlook

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