Coronavirus Could Halve Worldwide Growth, OECD Projects

RIO DE JANEIRO, BRAZIL – The coronavirus seems particularly aggressive among people weakened by other health conditions, and the world economy was an already frail patient even before the onset of the new virus that slowed down business activity around most of the planet.

That this will negatively impact global growth, is something no one doubts at this point. The question is how much. The Organization for Economic Cooperation and Development (OECD), an organization that includes industrialized countries, sends a clear warning: there is a bad scenario, and an even worse one.

The less bad one, which is currently the one on which all bets lie, based on the assumption that the Covid-19 peak will be overcome this semester and that its global effects will be “soft”, the OECD projects global growth of 2.4 percent for 2020, half a percentage point less than that projected in its last report in November (2.9 percent), a figure considered “low” then. The first quarter of 2020 could actually end negative, it now warns in its new review of the world economic outlook, released on Monday in Paris.

However, the crash could be even greater if the worst forecasts about the coronavirus are confirmed. According to the report, conveniently titled Coronavirus: The Threatened World Economy, a “more intense and lasting” outbreak could lead to a 1.5 percent drop in the world economy this year, half of what was projected before the epidemic began. This scenario could “drive many economies into recession, including Japan and the euro zone,” warns the OECD.

A rebound should be possible in 2021, when the OECD projects that the economy will bounce back with growth of up to 3.3 percent, three tenths more than projected in November. That is, as long as “the effects of the virus outbreak lose momentum, as assumed”.

The reduction in projections for 2020 affects all regions. For the eurozone, the OECD now projects growth of 0.8 percent this year, compared to the 1.1 percent it announced just over three months ago. For 2021, projections remain unchanged at 1.2 percent.

Of the three largest European economies, Italy, the country most affected by the coronavirus on the continent so far, is suffering the most, with a downward revision of 0.4 percentage points compared to November, leading to a projection of zero growth this year.

Meanwhile, France will grow a shy 0.9 percent (1.2 percent in November), and Germany will experience an even worse result, 0.3 percent (instead of 0.4 percent).

The outlook for the United States only drops slightly to 1.9 percent (-0.1), as it is less dependent on China than other economies, particularly the Asian ones. Nonetheless, the OECD points out that even in countries less dependent on the eastern giant, “the drop in confidence, interruptions in supply chains and a weaker external demand will moderate growth prospects”.

The impact on China, for which the OECD had already forecast a deceleration three months ago, is obviously greater. The economy of the coronavirus country of origin will grow 4.9 percent this year, according to that projection, eight tenths less than projected in November.

However, the world’s second-largest economy is expected to rebound in 2021 and return comfortably to a growth rate of more than 6 percent, as usual – in fact, 6.4 percent is now projected – “as production gradually reverts to the levels projected before the epidemic”.

An indication of the great uncertainty surrounding anything to do with coronavirus is the amount of “assumptions” that permeate the OECD report, which, as a quarterly review of its half-yearly studies, shows only global figures and those of the world’s leading economies.

The report stresses that governments can contribute to the scenario if they act “quickly and decisively to overcome the coronavirus and its economic impact”.

The short-term challenges posed by the coronavirus “underscore the need for policy actions to contain the spread of the virus, strengthen health systems, boost confidence and demand, and limit adverse effects on supply,” the OECD notes.

It further considers a “multilateral dialogue” to be “critical,” enabling “adequate containment measures to be defined to restrict the spread of the coronavirus and limit its economic costs”. In the worst-case scenario, if the economy weakens even further than expected, then “coordinated action both internally and among all major economies” will be crucial.

Commercial tensions and Brexit, unresolved issues

The coronavirus may rule today’s concerns, but the world economy has long been battered by other issues, and the new epidemic has not dispelled them. Above all, these are the “commercial and investment tensions” that “remain high and could continue to expand”, recalls the OECD.

In this regard, the organization considers the prospects of a trade agreement between the United States and China that would remove all existing surcharges from the trade war that began two years ago to be “uncertain”.

Another factor of uncertainty is that the WTO crisis cannot be solved by questioning its dispute settlement system, which threatens to increase the “uncertainties” affecting global GDP.

The OECD has also been warning, as it has been doing insistently in recent years, about the risk of the uncertainties still reigning in the future trade relationship between the United Kingdom and the European Union, now that Brexit has been completed, and that this could add further fragility and “volatility” to the economies of both regions.

Source: El Pais