Disruptions caused by the coronavirus outbreak that originated in China and is now spreading through the rest of the world are driving the global economy closer to a recession, triggering calls for fiscal and monetary intervention. Capital Economics cut its growth forecast by 0-4 percentage points to 2.5 percent for 2020 , in what the IMF considers recession territory. But Jennifer McKeown, head of economic research at Capital Economics, cautioned that if the outbreak became a global pandemic – a state some epidemiologists say has already been reached – the effect “could be as bad as 2009, when world GDP fell by 0.5 percent”.
Predictions by IMF chief Kristalina Georgieva a week ago that global growth would be hit by just 0.1 percentage points at 3.2 percent this year already seem out of date. The OECD in Paris will on Monday rush out a new interim forecast, setting out a greater impact than the IMF’s reading, and outline an alternative scenario with what officials describe as “more serious consequences”. A global recession in the first half of this year is “suddenly looking like a distinct possibility”, said Erik Nielsen, chief economist at UniCredit.
The question for policymakers is what to do as pressure grows for them to take preventive measures to stimulate the economy. “The ability of the economy to bounce back strongly depends in large part on whether we see effective policy intervention,” said Karen Ward, chief European market strategist at JPMorgan Asset Management. Some monetary policymakers have argued that coronavirus is a supply shock to the economy – removing workers from their places of employment and components from factories – and therefore makes stimulus ineffective.
Jon Cunliffe, deputy governor of the Bank of England, said on Thursday that since coronavirus was “a pure supply shock there is not much we can do about it”.
Other economists say, however, that it depends on the magnitude of the supply shocks. In a study of a global flu pandemic, Oxford university professors estimated that a four-week closure of schools – almost exactly what Japan has introduced – would knock o.6 percent off output in one year as parents would have to stay off work to look after children. In a 2006 pape, Warwick McKibbin and Alexandra Sidorenko of the Australian National University estimated that a moderate to severe global flu pandemic with a mortality rate of up to 1.2 percent would knock up to 6 percent off and advanced economy in the coming year.