The outbreak and spread of the coronavirus is a key risk to the global economic outlook. This snapshot outlines our current thinking about the potential economic fallout based on what we know so far.
The current strain of coronavirus (COVID 19) is more contagious than the SARS strain 17 years ago, but the medical data suggests it has a lower fatality rate. While both epidemics started in China, the global importance of the Chinese economy was far smaller in 2003—just 4.3 percent of world GDP, compared to 16.3 percent in 2019.
SARS lowered global growth by 0.15 percent. COVID-19 will have a significantly larger negative impact. How much depends on how far it spreads and for how long. Until late February, it looked like containment was working, with the number of new cases each week declining. This provided hope that the economic weakness would be concentrated in the first quarter of the year and economic activity would rebound sometime in April. Under this assumption, global economic growth would be reduced by 0.3 percentage points, reducing it from around 3 percent to 2.7 percent.
In recent days, however, the number of cases outside of China have risen and this raises the prospects of a bigger negative economic shock. However, it should be stressed that it is still early days and the number of cases outside of China are still limited. The future extent of contagion is still a matter of speculation. The COVID-19 outbreak has occurred when the world economy is weak. Global manufacturing suffered a contraction last year, reflecting the negative impact of the US-China trade war and uncertainty related to BREXIT. The good news was that the weakness in manufacturing was abating and the global slowdown looked to be stabilizing. Our team was expecting a slight acceleration in growth in 2020, but then the flu outbreak occurred. In our opinion, the economic fallout of COVID-19 will lead to a renewed downturn in global manufacturing. The real question is whether consumer confidence will decline in the wake of the flu pandemic news and the headlines from financial market volatility. So long as consumers continue to spend and the services industries grow, a recession should be avoided. At this point, it still looks like we are headed for a global economic slowdown, but the recession risks have certainly increased and certain sectors are particularly vulnerable.
The economic weakness so far has been concentrated in China. The biggest impact will fall on Chinese consumer spending, but it will also materially reduce investment and industrial production. China’s year-over-year growth rate may drop to 4 percent or even lower in the first three months of this year, and it may lead to a growth rate of around 5 percent in 2020—very weak for this country. The deceleration will be tempered by Chinese efforts to fight the outbreak, which can be additive to economic growth (e.g., through increased health-care activity), and by fiscal and financial stimulus to combat the slowdown.
As the flu spreads to other countries, their economic activity will be dampened by efforts to contain the virus. The extent of the economic disruption will be proportional to the extent of the outbreak, which we do not know at this point.
For Canada, the coronavirus outbreak and its fallout will affect economic activity this year in many ways:
For the Canadian economic outlook, successful containment of the epidemic and limited international contagion looked like it would lower economic growth by around 0.2 percentage points this year. This is bad news, as the economy delivered a weak performance in the fourth quarter of 2019 giving a weak handoff heading into this year. Then there is the negative impact of the rail blockages that hurt economic activity. This has lowered our tracking of economic growth in 2020 to 1.4 percent, which is a weak performance. News of the spread of the flu outside of China creates a downside risk to the outlook. At this point, the base case forecast is for slow growth—not a recession.
It’s worth highlighting that the previous assumption of limited economic impact is why neither the US Federal Reserve nor the Bank of Canada is signalling a plan to ease monetary policy in response to the economic fallout from the coronavirus outbreak. As the risk to the global economy increases, however, the central banks stand ready to deliver stimulus if required, and that looks increasingly likely.
We want to be clear: this is only our preliminary assessment, based on publicly available information and on historical economic relationships. The clinical economic impact estimates should also not detract from the human tragedy that’s unfolding.
Businesses need to think about their direct and indirect vulnerabilities. They should consider running scenarios or stress tests under different assumptions, paying particular attention to supply chains and second-round effects. However, they should not adopt a recession bias. It is important to understand the risks, but not let fear drive investment and hiring decisions.
We will continue to monitor developments and will update the Canadian forecast in our quarterly economic outlook in April.
Craig Alexander is the first Chief Economist at Deloitte Canada. He has over twenty years of experience in the private sector as a senior executive and leading economist in applied economics and forecasting. He performed macroeconomic research, regional and sector analysis, and fiscal market forecasting and modelling. Craig is a passionate public speaker and holds a graduate degree in Economics from the University of Toronto.