The index: global economic growth revised due to coronavirus

13 March 2020

Coronavirus effect seen in revised OECD forecast of early March, with China now responsible for 21% of global industry

OECD has recalculated economic growth based on epidemic peak in China by April and other outbreaks remaining mild and contained.

In November 2019, the OECD (Organisation for Economic Cooperation and Development) predicted the global economy would grow by an already weak 2.9%, but in early March 2020 this figure was revised downwards, forecasting a coronavirus-induced stalling worth 0.5 percentage points, setting global growth at 2.4%. In its economic outlook interim report Coronavirus: the world economy at risk, released in March 2020 amid coronavirus prominence on the global news agenda, overall growth for the G20 countries was also predicted to drop by half a percentage point, to 2.7% during 2020. Whilst growth for the Euro area is not expected to fall by quite as much (it has been downgraded by 0.3 percentage points), it means that for 2020, growth would be 0.8%.

The OECD report also warns about the impact a “longer-lasting and more intensive coronavirus outbreak” could have if it continues to spread across Asia, Europe and North America. It estimates COVID-19 could cause global growth to fall by 1.5 percentage points – nearly half the figure projected in November 2019. 

In its analysis of the issue, Laurence Boone, chief economist at the OECD, said the effects of the outbreak are being multiplied not only because the global economy has “extremely integrated supply chains”, but because the epicentre of the outbreak is arguably in the worst possible place: China. 

As its data reveals (see charts below), China has grown inexorably in the past two decades, growing its share of global industry from 8% in 2002, to more than 20% by 2019. This juggernaut-like growth translates to China taking a rising share of global GDP from 6.4% in 2002 to 17% by last year. Its share of global foreign investment has also tripled in that time (from 2.3% to 7.4%), while its share of global trade has also multiplied (4.2% to 11.1%). 

“China plays a far greater role in global output and trade, and this magnifies the global spillover to other countries,” finds the report.

China’s recent growth has been predicated on it being a massive importer of raw materials for a variety of infrastructure projects, and also starkly revealed by the OECD’s report is the extent to which the over-dominance of China as a consumer of raw materials translates into consumption of the likes of aluminium, copper, zinc and nickel. This means any slowdowns in manufacturing will have a significant domestic impact too. The upshot of this dominance, finds the report, is that China’s own growth for 2020 is predicted to fall by the greatest amount – by 0.8 percentage points, to just 4.9%.  

All told, if assessments about the impact coronavirus has on the world economy prove to be correct, growth at the 2.4% level for 2020 would represent the lowest level of economic expansion since the financial crisis of 2008. 

But for how long will this shock to the global economic system last? 

It’s the question many economists are scratching their heads about. For its part, the OECD does have slightly better news about economic prospects for the immediate future – although there is one main caveat: how long the outbreak is expected to last for. With it working on the assumption that the spread of coronavirus will peak by the end of the first quarter of 2020, it suggests the world economy will recover quickly, with global growth for 2021 expected to be 3.3%. The number of green arrows on the graph, top right, shows the number of countries with upward revisions to their 2021 growth predictions. Globally, the OECD has revised growth up by 0.3 percentage points – to 3.3% year on year – compared to the prediction it first made for 2021 in November last year. 

It argues G20 countries would benefit from a coordinated response in order to guarantee a return to growth. Boone said: “Global growth, cooling for the past two years to a subdued level, has been dealt a nasty blow by the coronavirus. If G20 economies implement stimulus measures collectively, rather than alone, the growth effects in the median G20 economy will be a third higher after just two years.”

The OECD also predicts China’s domestic economy will bounce back in 2021 with growth of 6.4%, which is 0.9 percentage points higher than was predicted just a few months earlier. 

The world waits to see.

Governments must ‘act immediately’

The world economy will not recover by itself. According to Laurence Boone, chief economist at the OECD, it’s vital governments play their part by ensuring containment strategies for the virus are implemented. “Governments need to act immediately to contain the epidemic, support the healthcare system, protect people, shore up demand and provide a financial lifeline to households and businesses that are most affected,” said Boone. “The virus risks giving a further blow to a global economy that was already weakened by trade and political tensions.” The OECD report suggests flexible working to preserve jobs, temporary tax and budgetary measures to cushion the impact in sectors most affected, including travel and tourism, automotive and electronic sectors, and “adequate liquidity” to be provided to allow banks to help with cash-flow problems during containment measures. 

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