RASHID A MUGHAL
ACCORDING to OECD, the Corona Virus out break will have a major impact on economic growth worldwide this year. It lowered its global GDP forecast by half a percentage point to 2.4%. This is thelowest rate sincethe 2008-09 financial crisis.That forecast assumes the virus outbreak fades this year, but a more severe outbreak “would weaken prospects considerably”, it predicted.. Already the global economy risks an outright contraction in the first quarter, the OECD said, in its first comprehensive study of the impact on the world’s major economies. In its very recent Economic Outlook, the OECD said, governments need to “act swiftly and forcefully”to overcometheCoronaVirus andits economic impact. Governments need to ensure effective and wellresourced public healthcare measures to prevent infection and contagion are in place, the OECD urged. It also said that healthcare workers and systems need to be supported, while the income of vulnerable social groups and businesses need to be protected during the outbreak. If the situation continues, the OECD said that coordinated multilateral actions will be needed for containment and mitigation. Fiscal spending would be the most effective means of supporting confidence and incomes, it added. In China, where the virus dubbed COVID-19 emerged in December, annual GDP growth is expected to reach just 4.9%, a 0.8 point drop from the OECD’s original growth forecasts announced last November, slowest in the last 30 years. “Output contractions in China are being felt around the world,” the 36-member Organization for Economic Cooperation and Development said, as the outbreak continuesto batter production,trade,tourism and business travel. The higher tariffs imposed on US-China bilateral trade over the past two years are an important factor behind the weakness of global demand, trade and investment. The US-China “Phase One” trade agreement in January is a welcome development that should help alleviate some of these effects. Nonetheless, the commitment by China to purchase an additional cumulative USD 200 billion of goods and services fromthe United States over 2020- 21 (relative to a 2017 baseline of around USD 180 billion) will be challengingto achieve without distortingthird-party trade and bilateral tariffs remain substantially higher than two years ago. Overall, the Phase One agreement reduces the drag on global GDP growth in 2020 and 2021 from the measures implemented over the past two years by around 0.1 percentage point per annum Production declines in China have been quickly felt by businesses around the world, given China’s key role in global supply chains as a producer of intermediate goods, particularly in computers, electronics, pharmaceuticals and transport equipment, and as the primary source of demand for many commodities. Temporary supply disruptions can be met by using inventories, but inventory levels are lean due to just-in-time manufacturing processes and alternative suppliers cannot easily be obtained for specialised parts. A prolonged delay in restoring full production in affected regions would add to the weakness in manufacturing sectors in many countries, given the time it takes to ship supplies around the world. Travel restrictions and the cancellation of many planned visits, flights, business and leisure events are severely affecting many service sectors. This is likely to persist for some time. Worldwide, Chinese tourists account for around one-tenth of all cross-border visitors, and one-quarter or more of all visitors in Japan, Korea and some smaller Asian economies. Exports of travel services to China, including the spending by Chinese visitors, are also significant in many countries. The virtual cessation of outboundtourism from China represents a sizeable near-term adverse demand shock.This is already apparent in many destinations; visitor arrivals in Hong Kong,Chinain February were 95%lowerthan usual. If the spread of the Corona Virus outbreak affects visitor numbers more widely across the major economies, there would be sizeable costs, with tourism accounting directly for 4¼ per cent of GDP in the OECD economies and almost 7% of employment. The overall impact on China would also intensify, reflecting the decline in key export markets and supplying economies. The financial and real economy risks are interrelated in two ways: First, a prolonged Covid-19 crisis could drive up the number of real economy bankruptcies, which makes it even harder for the financial system to manage. Meanwhile, a financial crises would starve the real economy of credit. It is fair to say the risk profile of the Covid-19 crisis is particularly threatening. While there is a policy playbook for dealing with financial crises, no such thing exists for a large-scale real economy freeze. There is no off-the-shelf cure for liquidity problems of entire real economies. Where does the Corona Virus shock fit in so far? The intensity of the shock will be determined by the underlying virus properties, policy responses, as well as consumer and corporate behaviour in the face of adversity. But the shape of the shock is determined by the virus’ capacity to damage economies’ supply side, particularly capital formation.At this point the battle ahead is to prevent a recession trajectory. Classically, financial crises cripple an economy’s supply side. There is a long history of such crisis, and policy makers have learned much about dealing with them. But Corona Virus extends liquidity and capital problems to the real economy — and does so at unprecedented scale. As though the twin risk of financial and real liquidity shocks were not enough,they are alsointerrelated, raisingthe stakes.These are testing times for policymakers: they must rise to the occasion by acting quickly, decisively and in collaboration. Despite the turbulence in financial markets, policymakers need to remain level-headed. They should employ their full arsenal of policy tools, including monetary, fiscal, trade and investment policies, to improve confidence. The unprecedented synchronized and coordinated policy response during the global financial crisis was critical to contain it. — The writer is former DG (Emigration) and consultant ILO, IOM.
