EcoWeek

The coronavirus and the profile for global growth in 2020: V, U or L?

Eco week 20-05 // 7 février 2020  
economic-research.bnpparibas.com  
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EDITORIAL  
THE CORONAVIRUS AND THE PROFILE FOR GLOBAL GROWTH IN 2020: V, U OR L?  
From an economic perspective, the coronavirus epidemic represents a combination of a demand, a supply and an un-  
certainty shock. The weight of China in world economy, its contribution to global GDP growth and its role in global value  
chains imply that the international repercussions are more far-reaching than during the SARS crisis in 2003.We have to  
brace for poor data in February and March, so the real test is whether April sees a pick-up in business surveys. Absence  
thereof would fuel concerns that the impact is more lasting in nature which would put us in a U-type scenario. An L-type  
scenario looks unlikely as yet whereas a V-type recovery would supposes a swift decline in new cases.  
At the start of the year, it looked like we were heading for a J-type in global value chains. Mounting anecdotal evidence at Western com-  
recovery of global growth.. Not a steep J, more like flattish growth in panies suffering from disruption of supplies coming from China –e.g.  
the early part of the year followed by a gradual pick-up in the second mobile phone, automobile sector- may even lead to an overestimation  
half, on the back of better business surveys, reduced uncertainty and of true macro impact.  
accommodative monetary and financial conditions. The outbreak of the  
An epidemic is a temporary shock so the question is how the recovery  
coronavirus has changed the scenario and the question now is whether  
will look like. V in case the number of new victims declines swiftly,  
the recovery will be V, U or L-shaped.  
which would mean that uncertainty drops quickly, unleashing pent-up  
From an economic perspective, the epidemic represents a combina- demand in China and restocking, with positive global repercussions. U  
tion of three shocks: a demand, a supply and a confidence shock. On if the peak in new victims is reached several weeks later, in which case  
the demand side various transmission channels can be distinguished. both consumption and production will be disrupted for a longer period.  
Chinese household consumption declines because people have to stay Global uncertainty would increase, weighing on corporate investment,  
home, suffer an income loss, feel uncertain and hence postpone big financial markets, hiring decisions. L would be a more extreme version,  
ticket purchases. Foreign travel declines as well as purchases of for- with an initial hit to growth and no recovery in the foreseeable future.  
eign goods, so imports decline. Public spending will increase slightly Such a scenario seems as yet quite unlikely. We have to brace for poor  
investment in health care facilities- or perhaps more significantly to data in February and March, so real test is whether April sees pick-up  
support growth. Corporate investment will decline because of reduced in business surveys. Absence thereof would fuel concerns that the im-  
demand but in particular, increased uncertainty.  
pact is more lasting nature which would put us in a U-type scenario.  
In terms of impact on the rest of the world, the decline of Chinese  
imports and tourism represents a direct spillover effect. Sector effects  
can be huge, think of tourism, restaurants, the IT sector, commodities  
or the automobile industry. . Countries which experience a decline in  
Chinese demand will in turn import less intermediate inputs that go  
in their exports. The relevant metric in assessing the exposure to a  
growth shock in China is how much value added from a given country  
is embedded in Chinese final demand -domestic and exports. This in  
turn can be related to the country’s GDP. As shown in the chart, this  
weight is for most countries very small. It is estimated that the SARS  
epidemic in 2003 represented a hit to Chinese GDP of 1%. Of course,  
William De Vijlder & Christine Peltier  
VALUE ADDED IN CHINA’S FINAL DEMAND BY COUNTRY OF ORIGIN  
(
IN % OF GDP OF THE COUNTRY OF ORIGIN)  
the weight of China in global GDP now is a multiple of what it was in  
1
2
003 , but even assuming a considerable drop in Chinese growth, the  
table indicates that the effect would be small. Clearly, this does not  
take into account the indirect consequences such as negative multi-  
plier effects, a drop in confidence and supply disruptions. Concerning  
this last point, the situation is very much different compared to 2003  
when there were no factory shutdowns in China. The global repercus-  
sions are also of a much bigger scale due to the integration of China  
1
. Based on IMF World Economic Outlook data, China represented 4.3% of world GDP in  
003 and 16.5% in 2019  
SOURCE: OECD, BNP PARIBAS  
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It looked like we were heading for a J-type recovery of global  
growth but the outbreak of the coronavirus has changed the  
scenario and the question now is whether the recovery will  
be V, U or L-shaped.  
The bank  
for a changing  
world  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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