Coronavirus: The economic impact.

Shivangi Singh

Introduction
The factor of uncertainty afflicting the economic system and the capacity of decision makers to
respond to the shock of the COVID-19 pandemic in a timely and effective manner is significant. A
recent study published which analyses the U.S. economy, finds that COVID-19 will cause a
substantial output contraction. Modelling simulations predict that over half of this contraction will
be attributable to COVID-19-induced economic uncertainty with its impact on investment, the
business environment, and higher transaction costs. The costs of uncertainty are comparable to
those generated by the pandemic itself

While there is no way to tell exactly what the economic damage from the global COVID-19 novel
coronavirus pandemic will be, there is widespread agreement among economists that it will have
severe negative impacts on the global economy. Early estimates predicated that, should the virus
become a global pandemic, most major economies will lose at least 2.4 percent of the value their
gross domestic product (GDP) over 2020, leading economists to already reduce their 2020
forecasts of global economic growth down from around 3.0 percent to 2.4 percent. To put this
number in perspective, global GDP was estimated at around 86.6 trillion U.S. dollars in 2019 –
meaning that just a 0.4 percent drop in economic growth amounts to almost 3.5 trillion U.S. dollars
in lost economic output. However, these predictions were made prior to COVID-19 becoming a
global pandemic, and before the implementation of widespread restrictions on social contact to
stop the spread of the virus. Since then, global stock markets have suffered dramatic falls due to
the outbreak, and the Dow Jones reported its largest-ever single day fall of almost 3,000 points on
March 16, 2020 – beating its previous record of 2,300 points that was set only four days earlier.
Mortality rates and economic impact are not
correlated
There are many channels through which an infectious outbreak influences the economy. The

traditional approach to evaluating the economic damages of an outbreak uses information on

deaths and illness to estimate the loss of future income due to death and disability. Losses of time,
income, and direct expenditure on medical care are also part of the traditional measures

of economic costs.

This traditional health economics approach underestimates the true costs of the current crisis.

We have seen that in prior infectious diseases for which there is no vaccine (e.g., SARS,
HIV/AIDS,

and pandemic influenza). However, the available evidence from these prior outbreaks provides

some information that can help us start thinking about the full implications of COVID-19.

Data from SARS, as well as the Spanish Flu from 1918, provides us with some idea of the
economic

shocks posed by the current outbreak.

However, it is important to highlight the differences. We are facing a different shock here. In the

COVID-19 crisis, the evidence suggests there is no correlation between economic impact and

mortality rates. The reaction of governments, companies, consumers and media, have all created

a simultaneous demand and supply shock. At the date of this report, I believe the health risk is

not necessarily correlated with the economic risk to the global economy.

This time it’s different.

Comparisons with other global crises, like the 2008 financial crisis, are not possible. This time we

are facing a number of new challenges, which prevent simple comparisons with the past:

o It is a global pandemic

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o It is not focused on low-middle income countries

o Interest rates are at historical lows

o The world is much more integrated

o This current crisis is generating spillover effects throughout supply chains

o We have simultaneously destruction of demand and supply

The above-mentioned facts can be seen in the light of recent business events. Unfortunately, the

economic impact of the current health crisis is being felt across sectors and countries. This is a

small sample of relevant events over the past month:

o Car manufacturers, such as Volkswagen and Ferrari, suspend production in Europe

o Sectors affected by the lockdown—transport, entertainment, retail, hotels and

restaurants—account for a quarter of Italian GDP

o Euro 2020, Tokyo Olympic Games, postponed to 2021

o Tourist destinations like Paris, Madrid, Venice and Rome are deserted

o Trade fairs and events are canceled

o In the U.S., job losses reached an unprecedented high.

o Cancellations of public gatherings and sporting events

o Cruise operators cancelling cruises

o Airlines have started by grounding their Airbus A380s fleets. Later, they grounded their

whole fleet

o Airlines asking employees to take two months unpaid leave

o NBA, football leagues, Formula 1 suspended until further notice

o Maersk canceled 50 sailings over coronavirus

o More than 10 million people have already lost their jobs in the U.S.

o Canada’s Cineplex Inc. is closing all of its 165 movie theatres

o McDonald’s closes seating areas in the U.S.

o Lufthansa reduces 90% of its long range flights and cancels more than 23000 flights until

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the end of April

The second quarter will be worse than first.

The recent evidence shows China’s GDP has decreased in the first quarter. Since China is

approximately 16% of the global economy, that is bad news for the whole world. Prior to the

crisis, the estimated GDP growth in China for the first quarter of 2020 was 6%.

As of today, we are entering into a global pandemic scenario. Over the past month, all over the

world, we have started to have restrictions put on public life. Countries followed the example of

China: lockdowns, mobility restrictions, massive quarantine hospitals, increase in public health

measures, protection of the elderly, etc. There are also limits on travel, companies are sending

their workers home, airplanes are grounded, etc.

The reality is that most western countries are 1.5-2.5 months behind China in terms of the

outbreak. They are also behind in terms of the implementation of corrective measures, and it is

doubtful whether the confinement efforts will be as successful as in China.

Therefore, it is guaranteed that the second quarter will be worse than Q1 in the majority of

countries worldwide. Recent evidence from the end of Q1 confirms this. In the U.S., more jobs

were lost (more than 10 million) during the last two weeks of March, than during the 2008-2010

crisis. In the last week of March, 6.7 million U.S. workers filed for unemployment benefits –

previous maximum was less than 700.000….

What we can learn from recent data

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or simply not working. We are facing travel bans, sporting event cancellations, and prohibitions

on gatherings. People in Europe are not using public transport and are avoiding public spaces,

such as restaurants, shopping centers, and museums.

All sectors will be affected. There is evidence that discretionary spending by consumers has

collapsed. However, according to the data shown in previous sections, the consequences of

COVID-19 will not be equally distributed throughout the economy.

The problems are particularly bad in hospitality related sectors. Indeed, the global travel

industry—from airlines to cruise companies, from casinos to hotels—is facing reductions of

activity of more than 90%. As described in previous sections, tourist destinations are deserted,

airlines are grounding fleets and firing staff, trade fairs and cruises are being cancelled, hotels

and casinos closing all operations….

Besides these, there are other businesses that rely on tourism and will suffer spillover effects. On

top of travel restrictions and quarantines, companies are cancelling travel and meetings, and

governments have closed borders. Additionally, it is well known that Chinese tourists are the

world’s biggest spenders.

Figure shows the distribution of travel and tourism's total contribution to GDP in different
countries.

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A substantial drop in travel affects many world destinations substantially. Obviously, countries

like Greece, Portugal, Mexico or Spain that are more reliant on tourism (more than 15% of GDP)

will be more affected by this crisis.

Despite globalization, much activity remains local. Many of the services we use on a daily basis

are not traded and remain locally sourced. Here too, there is a strong negative impact to the

economy. As people cancel appointments at the dentist, postpone their haircuts, do not go out

for their weekly meal, or wait to put their house on the market, this is a strong blow to service-

oriented economies. Indeed, in service sectors, the majority of the lost output is never going to

be recovered. If you are thinking of buying a mobile phone or a microwave, you are likely going

to wait and buy that product later (assuming this shock is temporary and you still have a job and

available income when it's over). However, if you do not go out to restaurants for your weekly

dinner during this shut-down, it is very unlikely that you will start to have dinner out every day

when the COVID-19 crisis disappears, to make up for the “lost dinners.” Nor will you cut your hair

twice in the same week.

Supply chains and global trade are disrupted

Supply chain networks is another channel through which the COVID-19 negatively impacts the

global economy. As evidence from different markets confirms, the functioning of global supply

chains has been disrupted by the current crisis. And this is generating spillover effects throughout

different levels of supplier networks.

Global trade in 2020 will fall in every region of the world, and will affect all sectors of the

economy. This will impact countries that are strong exporters (no output for their local

companies), but also those that are importers (lack of raw materials). The World Trade

Organization (WTO) expects global trade to fall up to 32% this year due to the coronavirus

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pandemic.

Car companies are shutting operations for lack of parts. This is happening in most industrial

sectors. Even in luxury goods, like Swiss watches, manufacturers are facing disrupted supplies of

components.

The disruption to supply chains will increase the cost of business for manufacturing companies.

Companies—like toy manufacturer Hasbro, which source almost 70% of its products from

China—are suffering. As factories shut down in China and transportation routes collapse, it has

been increasingly difficult for a company like Hasbro to get its products to market.

According to the U.S. Institute for Supply Management, 75% of companies report disruptions in

their supply chains. Also according to this survey, lead times have doubled for many U.S.

companies. In addition, there have been shortages of raw materials and final products. This is all

exacerbated by the shortage of air and ocean freight options to move products around the world.

The damage is real. Of course, this is questioning the just-in-time strategy of many companies,

who try to minimize inventories at all costs. The trade-off between efficiency and resilience has

been clear now to many managers. Understandably, some companies prefer to have facilities (or

suppliers) in various countries as a risk minimization strategy, even if this means a slightly higher-

than-average cost

Stock market evidences.

Stock markets collapsed in March 2020. Most stock indices around the world have registered

their biggest one-day falls on record. For example, the Dow Jones Index registered the worst ever

one-day fall (2,977 points on March 16, 2020). And several well-known companies have seen

their share prices fall by more than 80% in a few days.

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Figure shows the year-to-date decreases in stock markets for selected countries. The U.K. and

German stock markets have seen even worse performances than the U.S. (U.K. -37%, Germany -

33%).

Figure shows the top 10 worst-performing stock markets. Brazil is down by 48%, Poland by 38%.

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Figure shows the year-to-date stock returns for industries that have been hit particularly hard

since the COVID-19 outbreak. Oil, gas, and coal firms lead the negative returns (on average 50%

below start-of-the-year prices) driven largely by a plunge in oil prices and a decline in global

consumption. As expected, travel & leisure (including hotels, restaurants, etc.), aerospace,

mining, banks, and media are all examples of sectors that have fallen by more than 30%.

No sector has been left unharmed by this collapse in stock prices. Even traditionally stable sectors

(like utilities, tobacco and pharmaceuticals) are all down by 20% or more.

Key assumptions in the forecasts

In this uncertain environment, it is difficult to forecast the economic impact of the COVID-19

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crisis. As explained above, there is no historical benchmark that we can use directly. Indeed, no

prior crisis has started like this: a health event, global, that influences supply and demand

simultaneously, in a period when central banks have no firepower left (due to the zero or

negative interest rates already in place). In any case, we need to use available data to the best

extent possible in order to formulate key assumptions in the forecasting model.

The yearly GDP of a country is split, ignoring seasonality, into months. We then need assumptions

as to the duration of the current shutdown of economic activity. In the base scenario, the

significant shutdown of economic activity is assumed to last from mid-March to mid-May. That

is more or less the duration of the toughest control measures in China. And as of the date of this

report, several countries have announced complete lockdowns until the end of April. In this

scenario, May is then a gradual recovery period. This is the base assumption for the majority of

sectors. But for those that are tourism-related, it is assumed that the recovery phase will take a

bit longer (May and June). After the recovery period, that economic activity returns to the normal

expected path. That is, under the base case scenario, we will assume that, for instance, the number
of cars sold in August 2020 will return to the amount forecasted for the month back in

early 2020.

At the time of this report, the duration of the current crisis is unknown. These assumptions could

lead to a mildly conservative scenario, as there is no guarantee economic activity will resume

with normality once the containment measures are removed. Indeed, given the significant shock

to labor and product markets during the crisis months, with some probability, the post-crisis

months will be below the expectations set prior to the crisis. In our model, we are ignoring this

(more negative) hypothesis.

To base several estimations, we also use data from previous sections, on the Chinese and global

economies, global trade, plus high-frequency data from different sources, including sector-

specific impacts. The results are also calibrated with the reduction in consumption expenditure

during the SARS outbreak in China. Moreover, our model is further calibrated using the available

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data for China in the first months of 2020, in terms of its consumption, production, investment,

retail sales, etc., during the lockdown months. This may lead to an underestimation. Indeed,

Chinese consumers are heavy users of e-commerce. This means that in countries where e-

commerce is less developed, the impacts on consumption may be higher.

For each country, the model uses GDP decomposed into its’ different economic sectors. During

the crisis months, it is assumed that service-oriented sectors will be more impacted than

agriculture or industry. As explained in prior sections, with fewer tourists and lower consumption

overall, airlines, retail, hospitality and entertainment sectors are all expected to suffer greatly

from the outbreak. Stock market data in previous figures is consistent with this assumption, too.

Overall, this suggests that the economic cost of a recession are unequally distributed. Given the

different industrial composition of countries, impacts will be felt differently around the globe.

For instance, the model assumes that countries that have a larger tourism sector (as a % of GDP)

will be more severely affected than countries that are more industrial focused. Given the

documented disruption to trade flows, the model also assumes that countries more reliant on

exports will suffer disproportionally more.

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Main Results.

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Table shows the economic shock posed by the current COVID-19 crisis (and a confidence

interval), expressed as a percentage of GDP for each country. They provide an estimate of the

overall economic cost of the crisis under many assumptions (previous sections). Chief among

them, in this scenario, the shutdown is assumed to be 1.5 months, with May being a gradual

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recovery month.

In the base scenario, in which the economic situation would be normalized by the end of May,

the economic impact of the crisis ranges from 3.5 to 6% depending on the country. For instance,

in the U.S., the crisis is expected to cost nearly 4% of its GDP. Overall, for all countries analyzed,

an average economic impact of -4.5% of GDP is expected (median = -4.4%). The model takes into

account the different compositions of GDP in different countries. For instance, the higher the

weight of tourism, the higher the impact of the crisis. In addition, supply chain disruptions, and a

steep fall in global trade, exert further pressure on countries highly dependent on foreign trade.

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Estimated GDP growth in 2020.

In this section, we compute the expected GDP growth for each country under the base scenario.

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This table shows the data.

On average, for all countries analyzed, the expected GDP growth in 2020 is -2.5% (median = -

2.8%). The expected GDP growth is computed taking into account the (pre-crisis) expected 2020

GDP growth for each country (IMF end-2019 estimates) and the above-mentioned economic

costs of the COVID-19 crisis . For instance, France, was previously

forecasted to grow by 1.3% in 2020. Taking into account the economic impact of the crisis (-
4.3%),

the estimated growth rate of the French GDP is -3%.

The U.S. is expected to enter in a recession, with a GDP growth of -1.7%. It seems inevitable now

that the economic downturn due to the coronavirus will put an end to the longest-running

expansion in U.S. history.

Once again, the impact of the current crisis will be different around the world. China will, in this

scenario, still have a positive growth of GDP (pre-crisis 6%, now less than 2%). On the other hand,

most European countries will face significant recessions. Pre-crisis, European countries were not

expected to grow much. And now, they see contractions of their GDP of -3% to -4%. Judging from

prior recessions, a decline in GDP of this magnitude will significantly increase unemployment,

and public deficits. Overall, this scenario leads, for these countries, to an average growth in 2020

of -2.5%. This is substantially below the close to +3% growth rate seen in 2019.

The estimates in this section assume that, once the containment measures are removed,

economic activity returns to normality. It seems however possible that the economic pain will go

on for longer than the containment period. Having imposed bans and restrictions, governments

and public-sector bodies will be extremely cautious about removing them, and possibly, will

remove them gradually, for certain sectors/activities only. Also, given the potential shock to labor

and product markets during the crisis months, it is possible that the post-crisis months will be

below the expectations set prior to the crisis. In our model, we are ignoring this (more negative)

hypothesis.

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Conclusion.
The COVID-19 crisis spread rapidly throughout the world last month. We are facing a totally new

type of crisis. In this case, the health risk (actual mortality and infection rates) is not necessarily

correlated with the economic risk to the global economy. Historically, global trade has allowed

countries to share risk. This time, this channel is not likely to help much. This is a global shock

when the world is much more integrated. Interest rates are at historical lows, and the current

crisis is also generating spillover effects throughout supply chains.

A global recession now seems inevitable. But how deep and long the downturn will be depends

on the success of measures taken to prevent the spread of COVID-19, the effects of government

policies to alleviate liquidity problems in SMEs and to support families under financial distress. It

also depends upon how companies react and prepare for the re-start of economic activities. And,

above all, it depends on how long the current lockdowns will last.

At the date of this report, the duration of the lockdown, as well as how the recovery will take

place is still unknown. That is why several scenarios are used. In the base scenario, GDP growth

would take a hit, ranging from 3-6% depending on the country. As a result, in the sample of 30

countries covered, we would see a median decline in GDP in 2020 of -2.8%. In other scenarios,

GDP can fall more than 10%, and in some countries, more than 15%.

The results suggest that on average, each additional month of crisis costs 2.5-3% of global GDP.

The economic costs of a recession are unequally distributed. We already know many of the most

affected sectors. Also, based on prior crises, it seems that younger and less educated workers

will, unfortunately, be more likely to lose their jobs.

No one can accurately predict the final financial damage from COVID-19. This obviously depends

on timing, the severity of the pandemic into future weeks/months, and countries' policy

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responses. Also, hopes of a coronavirus vaccine mount, which would be welcome news. If the

ongoing crisis lasts until the end of the summer, the global economy faces the gravest threatseen

in the last two centuries.

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Global Preparedness Monitoring Board (2019). “A world at risk: annual report on global

preparedness for health emergencies”. Geneva: World Health Organization.

Haacker, M., (2002a). “The economic consequences of HIV/AIDS in Southern Africa”. IMF
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Paper W/02/38, 41-95.

Hai, W., Z. Zhao, et al. (2004). “The Short-Term Impact of SARS on the Chinese Economy”.
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Economic Papers 3(1), 57-61.

Huber, C., Finelli, L. & Stevens, W. (2018). “The Economic and Social Burden of the 2014 Ebola

Outbreak in West Africa". The Journal of Infectious Diseases 2018;0000:S1–7.

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“Italian Car Sales ‘Could Fall over 15%’ amid Coronavirus Spread”. (2020, March 19). The New
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Times. Available at: https://www.reuters.com/article/us-health-coronavirus-italy-autos/italian-

car-sales-could-fall-over-15-amid-coronavirus-spread-idUSKBN20T28B. [Accessed: 19 March

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