The COVID-19 pandemic has spread to over 210 countries and territories around the world. The pandemic is having a significant impact on global economic growth. So far, estimates indicate that the virus could cut the global economic growth by at least 0.5% to 1.5%, but could rise up to 2.0% every month if current conditions continue. Global trade could fall by at least 13% to 32%, depending on the extent and depth of the global economic downturn. The full impact won’t be known until the effects of the pandemic peak.
In this article, we discuss the global impact of COVID-19, particularly on the economy and global trade.
Economic Forecasts: Global Growth
The global economic situation remains highly fluid. Uncertainty about the depth and length of the health crisis-related economic effects are driving perceptions of volatility and risk in corporate decision-making and financial markets. Moreover, uncertainties concerning the global pandemic and the efficacy of public policies designed to mitigate its spread are contributing to market volatility.
On March 2, 2020, the Organization for Economic Cooperation and Development (OECD) lowered its forecast of global economic growth by 0.5% for 2020 from 2.9% to 2.4%, if the economic effects of COVID-19 peaked in the first quarter, which is apparent that it did not, global economic growth would increase by 1.5% in 2020. This forecast now seems to have been very optimistic.
On March 23, the Organization for Economic Cooperation and Development (OECD) Secretary Angel Gurria stated, “The sheer magnitude of the current shock introduces an unprecedented complexity to economic forecasting. The OECD Interim Economic Outlook, released on March 2, 2020, made a first attempt to take stock of the likely impact of COVID-19 on global growth, but it now looks like we have already moved well beyond even the more severe scenario envisaged then…. The pandemic has also set in motion a major economic crisis that will burden our societies for years to come.”
On March 26, the OECD changed its forecast of the impact on global economic growth from the pandemic and measures governments have implemented to mitigate the spread of the virus. According to the estimate, the current health and containment measures may reduce global GDP by at least 2.0% each month, or an annualized rate of 24%, approaching the level of economic decline not experienced since the Great Depression of the 1930s.
Before the COVID-19 pandemic, the global economic was already struggling to regain a broad-based recovery due to the lingering impact of trade disputes among major trading companies, trade protectionism, falling energy and commodity prices, and economic uncertainties in Europe over the impact of the UK’s withdrawal from the European Union. Individually, these issues presented a solvable challenge for the global collectively; however, collectively, these issues have significantly weakened the global economy and reduced the available policy flexibility of many national leaders, particularly among the leading developed economies. In the present environment, the COVID-19 pandemic may have an outsized impact. While the level of economic effects will gradually become clearer, the response to the pandemic may have a substantial and long-lasting impact on the way businesses organize their global supply chains, work forces, and how governments respond to a global health crisis.
The Organization for Economic Cooperation and Development estimates that improved direct and indirect economic costs through global supply chains reduced demand for services and goods, and drops in business travel and tourism mean that the adverse consequences of these developments for other countries are significant. Global trade, which are measured by trade volumes, declined in the last quarter of 2019 and was expected to decline further in 2020 due to weaker global economic activity linked with the pandemic, which is negatively affecting economic activity in different sectors, including hospitality, airlines, ports, and the shipping industry.
According to the OECD’s forecast:
- Retail and wholesale trade will be the most affected due to the containment restrictions, as well as professional and real estate services; however, there will be notable differences between countries.
- Business closures may reduce economic output in advanced and emerging economies by about 15% or more, while other emerging economies may experience an output decline by about 25%.
- Countries that depend on tourism may be affected more severely, while countries with large mining and agricultural sectors may experience less severe effects.
- Depending on the degree and timing of containment measures, economic effects may vary across different countries.
Moreover, the OECD argues that China’s rise as a global economic actor marks an important departure from previous global health episodes. China’s growth, along with globalization and the interconnected nature of economies through foreign investment, supply chains, and capital flows, magnify the cost of containing the spread of the outbreak through quarantines and restrictions on travel and labor mobility. China’s globalization and global economic role mean that trade is playing a significant role in spreading the economic effects of COVID-19.
More broadly, the economic effects of COVID-19 are affecting the global economy through three trade channels: 1) as a result of an overall drop in economic activity; 2) through reduced trade with commodity exporters that supply producers – this reduces their imports and negatively affects economic activity of exporters and trade; and 3) directly through supply chains as reduced economic activity is spread from goods producers to finished goods producers.
According to a forecast by the World Trade Organization of April 8, 2020, global trade volumes are estimated to decline between 13% and 32% in 2020 due to the economic impact of COVID-19. The World Trade Organization argues that the wide range in the forecast symbolizes the high degree of uncertainty concerning the length, depth, and economic impact of the COVID-19 pandemic and that the actual economic outcome could be outside this range – both lower and higher.
The World Trade Organization’s more optimistic scenario assumes that trade volumes will recover quickly in the second half of 2020 and that it will resume to its pre-pandemic trend. Another optimistic scenario is that the global economy will experience a V-shape recovery. On the other hand, a pessimistic scenario assumes a partial recovery that lasts into 2021. Another pessimistic scenario is that the global economic activity experiences a U-shaped recovery. However, the World Trade Organization concludes that the impact on global trade volumes may surpass the drop in global trade during the height of the 2008-2009 financial crisis.