OECD Economic Outlook, Interim Report March 2020: Coronavirus: the world economy at risk

OECD Economic Outlook, Interim Report March 2020 Coronavirus: the world economy at risk and governments cannot afford to wait.

OCED has just presented this morning (2 March) the last Interim Report: the impact of the Covid-19 outbreak on economic prospects is severe.

Growth was weak but stabilising until the coronavirus Covid-19 hit. Restrictions on movement of people, goods and services, and containment measures such as factory closures have cut manufacturing and domestic demand sharply in China.

The impact on the rest of the world through business travel and tourism, supply chains, commodities and lower confidence is growing.

Base scenario: temporary blow

Severe, short-lived downturn in China, where GDP growth falls below 5% in 2020 after 6.1% in 2019, but recovering to 6.4% in 2021.

In Japan, Korea, Australia, growth also hit hard then gradual recovery.

Impact less severe in other economies but still hit by drop in confidence and supply chain disruption.

The world economy is in its most precarious position since the global financial crisis

Global growth, cooling for the past two years to a subdued level, has been dealt a nasty blow by the coronavirus. High frequency indicators such as coal demand, suggest the Chinese economy slowed sharply in the first quarter of 2020.

As China accounts for 17% of global GDP, 11% of world trade, 9% of global tourism and over 40% of global demand of some commodities, negative spillovers to the rest of the world are sizeable.

There is mounting evidence of sharp declines in tourism, supply chain disruptions, weak commodity demand and falling consumer confidence.

How far the epidemic spreads will determine economic prospects

Even under a best-case scenario of containment to China and limited outbreaks in other countries as we see today, the OECD expects a sharp slowdown in world growth in early 2020. We have revised our projection for the year from an already low 3% in November to only 2.4%, lower than in any year since the financial crisis. In a downside-risk scenario where epidemics break out in some other countries across the globe, the slowdown will be sharper and more prolonged.

Our modelling suggests that the level of world GDP would fall as low as 1.5% this year, halving the OECD’s previous 2020 projection from last November of 3%. Containment measures and fear of infection would hit production as well as spending hard and drive many of the epidemic affected countries into outright recession.

Governments cannot afford to wait

Regardless of where the virus spreads, the world economy, previously weakened by persistent trade and political tensions, has already suffered a sharp setback. Households are uncertain and apprehensive.

Firms in sectors such as tourism, electronics and automobiles are already reporting supply disruptions and/or a collapse in demand. The world economy is now too fragile for governments to gamble on an automatic sharp bounce-back.

Click here to access the OECD report.