Coronavirus Pandemic to Cost Over a Trillion Dollars and Unleash a Fierce Recessionary Wave

Feb 25, 2020
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With the Dow Jones Industrial Average (DJIA) having plunged over 1,000 points on Monday, the third-biggest daily point drop in its 124-year history, fears regarding a coronavirus pandemic are mounting.

At least for the time being, governments and central banks continue to bet on a v-shaped recovery in the global economy, banking on the COVID-19’s rapid curtailment and elimination. However, economists have now begun to challenge this rosy scenario given that the coronavirus outbreak has, for all intents and purposes, broken containment and is spreading like wildfire.

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As an illustration, the International Monetary Fund (IMF) believes that the coronavirus epidemic will only cause a 0.1 percent deceleration in its global economic growth forecast, declining to 3.2 percent from the earlier 3.3 percent prognostication. However, IMF’s chief economist, Gita Gopinath, did concede in a Yahoo Finance interview that the declaration of a pandemic would risk “really downside, dire scenarios”.

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Echoing the same sanguine tone, the head of the World Health Organization called the new cases “deeply concerning,” but noted that the outbreak should not be considered a pandemic currently.

Nonetheless, as lockdowns throughout the globe expand and factories are shuttered, the odds for greater disruption are increasing. Given that Italy’s richest region is currently under quarantine, the coronavirus outbreak risks tipping the country into a recession with far-reaching consequences for the entire EU. Additionally, South Korea’s economy also appears to be on the brink, with consumer confidence plunging by most in five years.

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Given these realities, UBS Group AG Chairman Axel Weber is far more pessimistic than the IMF on the impact of the coronavirus epidemic, warning that the global growth may experience a massive drop from 3.5 percent to 0.5 percent and that China may actually witness negative growth in the first quarter.

A 2015 report from the World Bank estimated that a destructive pandemic could shave as much as 1 percent from the global GDP while a redux of the 1918 Spanish Flu may shave as much as 5 percent.

Similarly, a 2016 paper – co-authored by former U.S. Treasury Secretary Lawrence Summers – equated the annual financial impact of a pandemic to the long-term yearly cost of global warming. As per the paper’s findings, if pandemic deaths were to exceed 700,000 per year, the cumulative cost to the world’s economy from the premature loss of lives and income would total 0.7 percent of the global income.

Which brings us to the crux of the topic. Oxford Economics used its global economic model to determine the hit to the global GDP if the coronavirus outbreak were to morph into a pandemic. In one scenario, if the pandemic is limited to Asia, the world’s GDP falls by $0.4 trillion (0.5 percent) in 2020 compared to the baseline forecast. However, in the case of a global pandemic, the world’s GDP drops by $1.1 trillion (1.3 percent) and pushes both the U.S. and the EU into a recession. The report describes this scenario as a “short but very sharp shock on the world economy”. Bear in mind that we have already gone beyond the first scenario as the coronavirus outbreak is now entrenched in Italy.

Status of the coronavirus outbreak

Readers can procure real-time coronavirus status updates by following Nikkei Asian Review’s interactive virus tracker. A snapshot of this webpage for today is depicted below:

Coronavirus

The number of confirmed coronavirus cases in South Korea has almost reached 1,000. As of Tuesday afternoon, the number of confirmed cases jumped by 84, bringing the national total to 977, while the death toll has also increased to 10.

Europe's biggest coronavirus outbreak is currently in Italy, where seven people have died and over 220 have been infected. As of today, Iran has reported at least 60 cases and 12 deaths.

Hong Kong on Tuesday announced an extension in school closures until at least April 19 to prevent the spread of the coronavirus.

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