By Dan Steinbock
Although the epicenter of the novel coronavirus outbreak is now Europe, only a few major economies have launched effective battles against the pandemic. Hence, the rising levels of imported cases in China.
Since many countries, until recently, were either complacent and/or inadequately prepared to prevent the spread of the coronavirus, the global pandemic has cast a dark shadow over the global economy. It, too, shall pass, but not without effective global cooperation.
With the virus still spreading, the number of accumulated confirmed cases worldwide could soon exceed 200,000. In China, the turnaround came a month after the first novel coronavirus pneumonia cases were diagnosed, thanks to its strong containment measures. But outside China, although the first cases were reported after mid-January, they still continue to multiply and now exceed those in China.
In China, the impact of the coronavirus outbreak could ease in April. But outside China, epidemiologists anticipate a peak around June. If that’s the case, economic damage in China would be largely limited to the first quarter, but internationally it would continue well into the second quarter.
Assuming the rise in new imported cases in China and elsewhere can be kept down, even this relatively benign scenario would mean adverse repercussions on the world economy.
After mid-January, I projected three probable virus impact scenarios, which can now be reassessed. In a “SARS-like impact” scenario, a sharp quarterly effect, accounting for much of the damage, would be followed by a rebound. The broader impact would be relatively low and regional. Which is no longer on the cards, however.
In an “extended impact” scenario, the adverse impact would last two quarters. The broader impact would be more severe and affect on global prospects. That’s where the world economy seems headed to.
In an “accelerated impact” scenario, adverse damage would be steeper, even broader, with serious consequences on the global economy. If the containment measures continue to fail outside China, this scenario would ensue.
In early March, the International Monetary Fund projected global growth to fall 0.1 percentage points from the expected 3.3 percent. The estimate was too optimistic. Global growth could drop to 2.4 percent in 2020, or lower, if infection rates continue to rise. Before the coronavirus outbreak, quarterly growth in the eurozone was 0.1 percent the weakest in seven years. Now things will get worse. Germany’s GDP will continue to stall, and France and Italy will remain in contraction. In the United Kingdom, annual growth is likely to fall from 1 percent by another 0.2 percent more. In Spain, soaring coronavirus pneumonia cases will reverse the growth pickup. And with debt at 135 percent of GDP, Italy will be particularly vulnerable in 2020.
If the virus cases continue to increase in the eurozone, regional growth could halve to 0.5 percent or less.
In North America, local transmissions are rising rapidly, yet local testing is badly lagging. Despite greater awareness of the coronavirus and weeks of time to prepare, politization replaced mobilization coupled with a series of missteps, including faulty and belated local testing, failures in evacuations and quarantines, lax enforcement of rules and poor monitoring of self-quarantines.
Recently, the IMF projected US growth to slow down from 2.0 percent to 1.6 percent. After the White House’s delays of epidemic management, the Federal Reserve cut interest rates close to zero, coupled with a new round of $700 billion for quantitative easing. In the short-term, the move is understandable. But in the long term, it compounds new risks. As the US national debt now exceeds $23.5 trillion (107.3 percent of GDP), its debt burden is at par with Italy’s just before the 2010 European Union sovereign debt crisis.The Fed’s rate cut is likely to be coupled with fiscal stimulus, which may still not suffice. Yet central banks in Europe, the UK and Japan will follow footprints into more monetary and fiscal accommodation. But that may still fail to quell virus fears, if infection rates continue to soar.
–The Daily Mail-China Daily news exchange item