eco TV Week

The economic consequences of the coronavirus


The outbreak of the coronavirus is a textbook example of an exogenous shock. It forces a rethink of the scenario for growth for the next months by looking at the demand and the supply side effects.


TRANSCRIPT // The economic consequences of the coronavirus : February 2020

Part 1

A demand shock

The outbreak of the coronavirus is a textbook example of an exogenous shock. It forces a rethink of the scenario for growth for the next months by looking at the demand and the supply side effects.

On the demand side various transmission channels can be distinguished. Household consumption is impacted because people have to stay at home, suffer from an income loss, feel uncertain and hence postpone big ticket purchases. Foreign travel declines as well as purchases of foreign goods, so imports declines. Public spending will tend to increase, either to build health care facilities, or, possibly, to support growth (this could also happen via tax cuts or spending incentives). Corporate investment will decline because of reduced demand but in particular, increased uncertainty. Companies will probably hold off investing until they have enough confidence that the epidemic will not spread further. The decline of imports and tourism represents a direct spillover effect to the rest of the world. Exports can also suffer because of what happens on the supply side.

Part 2

A supply shock

Production declines because of a drop in demand and a shutdown of factories, shops and offices. Global value chains cause international repercussions, all the more so because substitution effects will be small in the short run, because customers prefer to wait rather than switching to another brand, or simply because it’s impossible to reorganise the value chain at short notice. In addition, for a temporary shock, this would make little economic sense. Another consequence is massive destocking.

Part 3

What kind of recovery?

Estimates of the consequences for growth are very much hypothetical. SARS is estimated to have had a negative impact on GDP growth in Hong Kong of 2.6% for the full year 2003 and 1% in China. In the US the impact was tiny (0.07%).

Of course, that was another era: China’s economic size and weight in the world economy were a lot smaller, tourism was a fraction what it is today and the importance of China in global value chains was also a lot smaller.

To put it differently, the impact will be bigger than SARS but how much very much depends on the assumptions.

The coronavirus epidemic comes at a particularly bad moment: based on survey data, the global economy was showing tentative signs of a growth pick-up and, in all likelihood, this momentum will now be stopped or even reversed, depending on the country or sector.

The key question is, for how long and, subsequently, what kind of recovery can be expected, once the epidemic has passed its peak.

On the former question, the view of financial markets seems to be that it will be brought under control quite rapidly. This implies it is crucial to indeed see quite soon a lasting reduction in the daily number of new victims.

On the latter, the one about the type of recovery, the case can be made for a V-shaped recovery in demand. Inventories, after the big drawdown, will need to be replenished. There is also a phenomenon of pent-up demand which will be unleashed, although that will probably be less the case as far as tourism is concerned.

In the medium run, the supply side may also be impacted via changes in global value chains in case companies would consider to be too dependent on a single country in terms of intermediate inputs.

In the short run, we have to prepare ourselves for weak data in February and March so business surveys in April will become particularly important to assess whether by then we will have seen the worst in terms of economic impact.



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