OECD warns COVID-19 could halve global growth

Economic forecasts slashed even in best-case coronavirus scenario

The Organisation for Economic Cooperation and Development has warned that coronavirus has the potential to wipe out half of economic growth this year.

The Paris-based organisation slashed its growth forecasts, saying COVID-19 presents the biggest danger to the global economy since the 2008 financial crisis.

Aside from the health concerns, the disease could prompt wider disruption of supply chains and restrictions on the movements of people, goods and services.

“Even in the best-case scenario of limited outbreaks in countries outside China, a sharp slowdown in world growth is expected in the first half of 2020 as supply chains and commodities are hit, tourism drops and confidence falters,” the OECD said in its Interim Economic Outlook released on Monday.

The OECD expects global economic growth to drop to 2.4% this year from an already weak 2.9% in 2019. Prospects for 2021 are slightly better but still modest at 3.3%.
The revised growth prospects show a sharp downturn for China to below 5% this year, after 6.1% in 2019.

The combination of containment measures and loss of confidence could hit production and spending, and drive some countries, including Japan and the euro area, into recession.

Given China’s 15% share of the global economy, any local slump is felt internationally.

Even at this early stage of the coronavirus outbreak, the disruption of China-based supply chains is causing lengthy delays in component shipments. Apple has warned that this will have an impact on its first quarter revenues.

The Institute for Supply Chain Management index, which tracks US manufacturing activity, fell to a lower-than-expected 50.1 in February, compared with 50.9 in the previous month, as factory closures around the world hit the sector.

In a worst-case scenario of widespread contagion in Asia and the world’s advanced economies, global growth could stall to as low as 1.5%, about half of the OECD 2020 forecast issued last November.

“The virus risks giving a further blow to a global economy that was already weakened by trade and political tensions,” said OECD chief economist Laurence Boone. “Governments need to act immediately to contain the epidemic, support the health care system, protect people, shore up demand and provide a financial lifeline to households and businesses that are most affected.”

This should be done through higher government spending to support the sectors most affected by the downturn like travel and tourism, and the automobile and electronic industries, the OECD advocates.

In the most-affected countries, adequate liquidity needs to be provided to allow banks to help companies with cash-flow problems while containment measures are in force, it added.

The OECD Outlook further suggested that if the virus spreads more widely, the G20 economies should come together to coordinate international healthcare support and stimulate the economy with fiscal and monetary measures.

The European Central Bank has already announced it was ready to take appropriate and targeted measures, while Bank of England governor Mark Carney told a UK parliamentary committee on Tuesday there would be a “powerful and timely response” from central banks.

These measures will be different in each jurisdiction but they will “share a common goal to achieve bridging – supporting the economy through a potentially challenging period”, Carney said.

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