eco TV Week

The economic consequences of the coronavirus

2/7/2020

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.

William DE VIJLDER

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.

 

 

View more videos Eco TV Week

On the Same Theme

How to spend it? Vouchers versus VAT cuts 7/3/2020
The bleak outlook for the labour market implies there is a strong case for measures to boost consumer spending in order to keep the recovery on track. A host of instruments can be considered: vouchers, VAT rate cuts, income tax cuts, tax credits, negative income taxes. Amongst these, a voucher programme offers many advantages given the possibility for fine-tuning the target group, the final beneficiaries, the type of spending and the regional dimension. However, it comes with considerable administrative costs.
Business sentiment continues to improve 7/3/2020
With an increasing number of countries scaling back if not removing the lockdown measures, the purchasing managers’ indices have improved further in June. The world manufacturing PMI is now even above the level reached in February. Big increases have been noted in the US, France, Germany, Ireland, Spain, Turkey, Indonesia and Vietnam. Brazil and India have also seen a considerable improvement, which seems at odds with the health situation in these countries [...]
COVID-19: main fiscal and monetary measures 7/2/2020
This document presents the budgetary and monetary measures taken in several countries as well as the EU and the eurozone to address the economic consequences of the Covid-19 pandemic. It is presented in such a way that it facilitates an international comparison.
The rebound in economic activity is clear, but will it continue? 6/19/2020
Our barometer shows an improvement in China’s economic momentum during the period between March and May 2020, compared to the preceding three months. This came as no surprise as economic activity collapsed in February, the first month of the lockdown, before beginning a very gradual recovery in March...
The outlook for government bonds yields: some certainties, many uncertainties 6/17/2020
After dropping significantly when the pandemic was spreading, government bonds yields have evolved sideways in April and May, despite a rally in equities – which typically is accompanied by rising yields – and a huge increase in borrowing requirements. For the foreseeable future, two certainties will play a role – the current monetary policy stance will be maintained for a long time; budget deficits will stay high compared to pre-pandemic levels – as well as many uncertainties such as the pace of recovery. In the absence of a second wave, yields should increase somewhat, although central banks will not tolerate a significant increase.
Does forecast uncertainty matter? It depends 6/5/2020
The publication by the ECB of different economic scenarios illustrates the extent of uncertainty which at present surrounds the forecasts for key macroeconomic variables. As a consequence, companies may hold off investing, preferring to wait for better visibility. While understandable at the micro level, such a wait-and-see attitude could act as a drag on growth and reinforce the view of companies that their caution was warranted. The large increase in the dispersion of earnings forecasts points to huge uncertainty at the individual company level. However this has not stopped the US equity market from rallying.  Although several factors help to explain these different reactions to uncertainty, such dissension cannot last forever. At some point company cautiousness or investor bullishness will have to give in.
Purchasing managers’ indices have troughed but the level remains low 6/5/2020
The gradual easing of lockdown measures has for the month of May, as expected, led to an improvement in the manufacturing PMIs in all countries with the exception of the Netherlands and Japan. The extent of the rebound however varies greatly between countries [...]
Covid-19, unemployment, human capital and households’ balance sheet 5/28/2020
In the first episode, William De Vijlder takes a look at households’ balance sheets by considering how assets and liabilities are influenced by the pandemic. We will also see how the loss of human capital due to the deterioration of the labour market plays a key role in the post-pandemic economic environment.
Dilemma for businesses: reduce debt or invest? 5/28/2020
The second episode focuses on non-financial companies. As well as having a considerable impact on their short-term (cash) and long-term assets (imperative of aligning their operational model with new requirements in terms of supply chain resilience), the Covid-19 crisis has obliged businesses to increase their indebtedness. This confronts them with a dilemma whether to strengthen their balance sheet by paying back debt or to maintain a high degree of leverage an invest.
Ever bigger central balance sheets raise question about where is the limit 5/28/2020
Central banks have played a key role in supporting the economy during the pandemic-induced recession. To do so, they increased the size of their balance sheet. William De Vijlder explains the mechanisms governing this increase in their balance sheet. Is there any limit on how far it might go? He also explains the concept of direct monetary financing.

ABOUT US Three teams of economists (OECD countries research, emerging economies and country risk, banking economics) make up BNP Paribas Economic Research Department.
This website presents their analyses.
The website contains 2458 articles and 632 videos