COVID-19 and Global Growth: How Low Can It Go?

4 MINS READMar 25, 2020 | 15:05 GMT

The pandemic's projected impact on major economies has become increasingly grim as more bad news comes in on countries already past the peak of the crisis, as well as those still suffering under national lockdowns....

The Big Picture

Economic forecasting of the effect of COVID-19 cannot keep up with the spread of the virus. The pandemic is still mainly a global health emergency with unknown effects for which it’s extremely difficult to make accurate economic assessments. Projections for global growth currently depend on China’s recovery and the extent of containment measures, such as lockdowns in the United States and Europe.

What Happened

Economic projections of the quarterly impact of COVID-19 on major economies are increasingly pessimistic with major downward revisions by forecasters. Some prominent predictions have been extant for only a matter of days as more bad news comes in on countries already past the peak of the epidemic (namely China and South Korea), as well those still suffering under national lockdowns. The International Monetary Fund, meanwhile, is catching up with private forecasters and now projects a global recession in 2020 that is "at least as bad as during the global financial crisis or worse." During the global financial crisis, world GDP growth fell from 4.3 percent in 2007 to 1.9 percent in 2008 and -1.7 percent in 2009 before eventually recovering to the pre-crisis level in 2010. Other recent forecasts also point aggressively down, including investment banking projections of a 20-30 percent annualized decline in the United States for the second quarter of 2020. 

Why It Matters

Assessing the accuracy of assumptions underlying any COVID-19 economic forecast is now especially difficult, given the rapidly changing conditions and the high level of unknowns surrounding the pandemic. Forecasters lack historical data for which to assign probabilities to outcomes in what is essentially a situation of pure uncertainty and unquantifiable risk. 

China, which was affected first and now seems to be in recovery with fewer new coronavirus cases, remains the global prototype for assessing the economic impact. Initial COVID-19 economic forecasts — which were based on the effects of the 2003 SARS epidemic and the 2009 H1N1 outbreak — projected China’s GDP growth to fall by no more than 2 percent annualized in the first quarter of 2020, followed by a quick recovery in the second quarter. But actual hard data from China is much worse than expected and now suggests a first-quarter GDP dip of up to 20 percent on an annual basis, compared with earlier projections of only a 5-10 percent annualized decline. Industrial production for January-February was forecasted to be down by only 3 percent, but actual data showed a decline of 13.5 percent from a year earlier. Likewise, retail sales were forecast to be down by only 4 percent but fell by 20.5 percent during the same timeframe. Gross fixed investment in capital assets fell six times more than was expected with a 24 percent decline.

Projections for global growth depend on China’s recovery and the extent of containment measures such as lockdowns in the United States and Europe.

With the morbidity rate of the virus now declining in China, the country’s economic capacity may be as much as 85 percent recovered, but some estimates are as low as only 60 percent. But even if the country is getting back to work, it will take time to bring business activity up to normal. Companies and consumers will remain cautious, especially as Chinese exporters struggle with an unknown level of external demand destruction as the rest of the world battles the virus. 

What's Next

In addition to China, other remaining unknowns include how wide COVID-19 will spread in the United States, whether it is a seasonal disease, and the still-untested ability and capacity of many health care systems to respond effectively and quickly to the virus. The speed and scope of fiscal responses to support household incomes in affected countries are remain unknown as well.

Due to these uncertainties, it is still not possible to gauge quantitatively the long-term impact of the pandemic on a number of factors — including productivity, the effect on global supply chains, and the extent of and length of retrenchment in consumption and investment — though all will likely see some fallout. Moreover, the financial effects of loss of growth are squeezing business earnings, and there will certainly be a wave of bankruptcies that may or may not be attenuated by government action. 

As for recovery, pent-up demand cannot be satisfied or erased instantaneously if large numbers of people lose incomes. Investments will also not be quick to snap back. That could preclude a V-shaped recovery, especially as defaults reverberate through the economy. The main concern remains a "doom-loop effect" in which a loss of income by consumers and business triggers a spiral of defaults and deepens the depth and duration of a downturn.

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