COVID-19: China, global economy face gravest threat since financial crisis

Covid-19 is spreading from China to other regions, causing human suffering and economic disruption.  It is raising health concerns and the risk of wider restrictions on the movement of people, goods and services.  The world is also seeing falls in business and consumer confidence and slowing production.  Lee Kok Leong, executive editor, Maritime Fairtrade, reports

Covid-19 threatens the global economy with its greatest danger since the financial crisis, according to the Organisation for Economic Co-operation and Development (OECD)’s latest Interim Economic Outlook.  The Interim Outlook presents both a best-case scenario in which the extent of the coronavirus is broadly contained and a “domino” prospect of contagion that is more widespread.

Growth prospects for China have been revised down sharply to below five percent this year after 6.1 percent in 2019.  High frequency indicators, such as coal demand, suggest the Chinese economy slowed sharply in the first quarter of 2020.  As China accounts for 17 percent of global GDP, 11 percent of world trade, nine percent of global tourism and over 40 percent of global demand of some commodities, negative spillovers to the rest of the world are sizeable.  There is mounting evidence of sharp declines in tourism, supply chain disruptions, weak commodity demand and falling consumer confidence.

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.  Global economic growth is seen falling to 2.4 percent for the whole year, compared to an already weak 2.9 percent in 2019.  It is then expected to rise to a modest 3.3 percent in 2021.

In the domino worst case scenario, broader contagion across the wider Asia Pacific region and advanced economies, as has happened in China, could cut global growth to as low as 1.5 percent this year, halving the OECD’s previous 2020 projection from last November.  Containment measures and loss of confidence would hit production and spending and drive some countries into recession, including Japan and the Euro area. 

Regardless, the OECD calls on governments to act immediately to limit the spread of the coronavirus, protect people and businesses from its effects and shore up demand in the economy.

OECD Chief Economist Laurence Boone said: “The virus risks giving a further blow to a global economy that was already weakened by trade and political tensions.  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.”

The Outlook says that flexible working should be used to preserve jobs.  Governments should implement temporary tax and budgetary measures to cushion the impact in sectors most affected by the downturn such as travel and tourism, and the automobile and electronic industries.

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.  If the epidemic spreads widely, the G20 economies should lead an internationally coordinated framework for health care support, combined with coordinated fiscal and monetary stimulus to rebuild confidence.  

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