The international propagation of the coronavirus forces a rethink of the consequences for the global economy
Coming after the outbreak in China, the marginal impact on the global economy of the spreading of the epidemic should, a priori, be rather limited
Yet, financial markets have reacted very negatively. This jump in risk aversion reflects concern that the economic consequences may have been underestimated thus far as well as increased focus on tail risk
This ‘financial accelerator’ phenomenon may in turn contribute to the worsening of the growth outlook
The international propagation of the coronavirus forces a rethink of the consequences for the global economy. The epidemic, which combines a demand, a supply and an uncertainty shock, has a direct impact on the real economy via a decline in spending and production –due to the shutdown of factories and offices as well as travel restrictions-, which in turn creates international spillover effects: trading partners experience a decline in exports to the virus-hit country and supply chain disruption may cause a drop in production. The global impact depends on the size of the country and its role in global supply chains, hence the concern about the developments in China. These channels of transmission are repeated in every country where the virus spreads but the marginal impact on the global economy of the international propagation of the epidemic should, a priori, be rather limited considering that countries like Italy have a far smaller weight than China and should also generate smaller spillover effects. The regional impact can, however, be more significant. Italy for instance, has a weight of 15% in eurozone GDP.
