OECD warns of severe economic hit from virus outbreak

PARIS: The coronavirus outbreak will have a major impact on economic growth worldwide this year, the OECD warned Monday as it lowered its global GDP forecast by half a percentage point to 2.4%, the lowest rate since the 2008-09 financial crisis.

That forecast assumes the virus outbreak fades this year, but a more severe outbreak “would weaken prospects considerably”, the group of free-market economies said.

Already the global economy risks an outright contraction in the first quarter, the OECD said, in its first comprehensive study of the impact on the world’s major economies.

Stock markets plummeted worldwide last week as investors fled to bonds and other safe havens on fears that consumer and business spending will freeze up as the virus spreads, curtailing corporate profits.

In China, where the virus Covid-19 emerged in December, annual GDP growth is expected to reach just 4.9%, a 0.8% drop from the OECD’s original growth forecasts announced last November.

On Saturday, the Purchasing Managers’ Index (PMI) of activity at Chinese factories plunged to 35.7 points in February, well below the 50-point mark that separates growth and contraction.

It was the worst level since China began recording the figure in 2005.

“Output contractions in China are being felt around the world,” the 36-member Organization for Economic Cooperation and Development said, as the outbreak continues to batter production, trade, tourism and business travel.

Efforts to contain the virus in China have entailed quarantines and work and travel restrictions that caused delays in restarting factories after the Lunar New Year holiday, as well as sharp cutbacks in service sector activities.

A virtual cessation of outbound tourism from China represented “a sizeable near-term adverse demand shock”, the OECD added.

Nearly 90,000 people have been infected in over 60 countries, and more than 3,000 people have been killed as governments scramble to keep the outbreak from spiralling into a pandemic.

Major caveat

Compared to similar events in the past, such as the SARS outbreak of 2003, “the global economy has become substantially more interconnected, and China plays a far greater role in global output, trade, tourism and commodity markets”.

“This magnifies the economic spillovers to other countries from an adverse shock in China,” it said.

Italy, Japan and Russia saw their 2020 forecasts trimmed by 0.4%, while Canada, France, South Korea, Turkey and Argentina had declines of 0.3%.

Growth in the euro area was projected to remain “sub-par” at about 1% per year on average in 2020 and 2021, the OECD said.

The OECD lowered its forecast for India for 2020 by 1.1%, for South Africa by 0.6%, and for the G20, Australia and Mexico by 0.5% each.

But the forecasts are based on the assumption that the epidemic peaks in China in the first quarter of 2020, and that outbreaks in other countries prove mild.

“A longer lasting and more intensive coronavirus outbreak, spreading widely throughout the Asia-Pacific region, Europe and North America, would weaken prospects considerably,” the OECD warned.

“In this event, global growth could drop to 1.5% in 2020, half the rate projected prior to the virus outbreak,” it said.

If the virus fades “as assumed,” global growth could recover to 3.3% in 2021, and Chinese growth to 6.4%, it said.

Swift action needed

The OECD urged governments to “act swiftly and forcefully” to overcome the outbreak and take measures to protect the incomes of vulnerable social groups and businesses.

Governments could help by providing unemployment insurance for workers placed on unpaid leave and by covering virus-related health costs for all.

Measures that reduce or delay tax or debt payments or lower energy costs for firms in hard-hit regions and sectors should be considered, the OECD said, as well as temporary reductions in the level of reserves that banks are required to hold at the central bank.

Other risks for the economy, it said, include the trade tensions between the United States and China, and uncertainty about the future trade relationship between the European Union and Britain in the wake of Brexit.