The economic damage so far from Coronavirus is just half the average of past pandemics

The economic damage so far from Coronavirus is just half the average of past pandemics
  • The spread of coronavirus is taking a toll on the global economy and markets are melting.
  • However, a look at the past data shows that there may be more damage to come.
  • Global pandemics in the past have squeezed growth, on average, by 4-5% and in the current crisis, global growth is down only about 2%, according to Goldman Sachs.
Economists at Goldman Sachs had projected a 2% squeeze in global economic growth between January and March 2020. However, now they fear that the damage from coronavirus may be sharper than anticipated earlier.

The slowdown in China is estimated to be worse than expected, the disruption in global supply chain has been more acute, and the spread of the coronavirus has also hit consumption. “Our analysis shows effects on quarter-on-quarter annualized global GDP growth of 5 percentage points in Q1 and 2 percentage points in Q2, followed by a rebound in the second half of 2020, leaving our full-year global growth forecast at about 2%. All else equal, this would imply a short-lived global contraction that stops short of an outright recession,” a Goldman Sachs report projected.

The report also looked at GDP changes during other pandemics including the 2003 SARS episodes in China, Hong Kong, and Canada, the 1957 Avian Flu in the US, and the 2015 MERS episode in South Korea. “The average episode saw a GDP hit of 4-5% in the 1-2 quarters after the outbreak, although the variation is substantial,” the report concluded. If the same trend were to be held as a benchmark for the spread of coronavirus, the slump in the world economy is only half done.

These are at least five ways in which the coronavirus is hurting the global economy, according to Goldman Sachs.

  1. Direct China impact. This is simply the impact of the virus on economic activity in China multiplied by China’s weight in the global economy.
  2. As Chinese economy slows down, it will import less goods and services and that will hurt the companies in other countries that supply to China.
  3. The number of Chinese tourists around the world is expected to fall 90% starting February, with a very slow recovery thereafter.
  4. A lot of products made in China are either directly sold in other countries, or they are key inputs that go into the making of the final product. The supply of these goods have been hit, hurting global supply chains affecting factories around the world, from electronics to pharmaceuticals. “”The main conclusion was that the relationship is nonlinear, with little to no effect in a short shutdown but sharply rising effects in a longer shutdown,” Goldman Sachs concluded.
  5. The tightening financial conditions reduce employment growth and that could lead to lower household income and consumption.
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