A very severe, but most likely temporary shock, is hitting the world economy.
10.03.2020 | 09:21 Uhr
A severe shock is hitting the world economy, both from a demand and supply side perspective (there’s also a financial and confidence channel). It’s a broad and global hit as we are talking about goods, services, people, short-term financial flows, FDI, international banking, corporates, commodities and exchange rates. Also, it’s a pandemic. It’s a supply issue because we are talking about significant disruptions in the global supply chain, factory closures, cutbacks in many services and activities. It’s also a real demand issue (business travel, tourism, education, services, entertainment and leasure services, commodities,...). It’s a confidence shock to the extent that high uncertainty will lead to reduced or delayed consumption of goods and services but also delayed or even foregone investment. Also, the sharp drop in energy and metal prices means that headline inflation will decrease substantially due to base effects kicking in. It will also impact investment.
There’s a lot we don’t know and uncertainty looms large. The effects are non-linear, meaning that a longer lasting outbreak and even more drastic containment measures would have enormous knock-on implications. That said, even though we significantly downgrade our growth and inflation numbers for 2020 (after the draconian measures put in place in northern Italy over the weekend), our base case scenario still is that we’re dealing with a temporary (albeit very severe) shock to the real economy. This means that economies are expected to recover once the uncertainty fades. True, the number of cases will continue to rise exponentially over the coming weeks. But, be careful not to extrapolate the rapidly rising number of infections. At the some point, as we are now seeing in China, the number of cases will come down. The lockdown measures are important to alleviate the stress on the healthcare system. It will flatten the curve of infections (see graph right below) but it will also come with bigger economic costs.
In China, as the new cases of COVID-19 are falling every day, activity is slowly picking up again as factories are reopening. However, many companies are still operating below capacity and the fear of a second round of propagation of the virus is real as countries like Italy, South Korea and Iran are becoming new major hosts of the virus. PMI data also shows that employment in China has been impacted by the containment measures taken due to the COVID-19 outbreak, indicating that the economic impacts on the Chinese economy will not be only short term, but some long-term effects might linger.