The Economic Consequences of Coronavirus

“The biggest danger since the financial crisis”. The Organisation for European Cooperation and Development (OECD) does not mince its words in it its recent Interim Economic Outlook concerning the macro-economic effects of the coronavirus on the global systems.

The OECD analysis provides a summary of the fears about the effects that Covid-19 could have on the global economy whose general growth had already been gradually exposed to the risks of trade wars and geopolitical tensions over the course of 2019 and now risks coming to a grinding halt. Coronavirus brings to light the contradictions and fragility of the global economy, from the oversizing of stock markets to the fragility of the planet’s logistics and commercial chains. Above all, it reveals systemic weaknesses and political problems in the response to the crisis: central banks intend to act with the known and ineffective system of massive injection of money into the financial circuit, governments, above all the European ones, are reluctant to put forward proposals to boost spending in the real economy.

Fall in growth all over the world

OECD data on growth expectations for 2020 are clear. The organisation sets forth two possible scenarios for the current year. The first envisions a gradual decrease in the contagion and a concomitant upturn in economic confidence. The second, however, is a “domino effect” with a more general contagion. In the first case the forecasts of world growth would go from the 2.9% expected in November to a more contained + 2.4%, while in the second the interruptions to trade, the drop in domestic demand in the most affected countries and the systemic multiplier would take growth to a more worrying + 1.5%, less than half the figure that was expected until September 2019 when + 3.2% was estimated for 2020.

The OECD is calling upon governments to take decisive measures and recalls that the epicentre of the reduction in growth will, as expected, be in China. China will not go under but the forecasts of 4.9% growth in 2020 are still one percentage point lower than expected. “Output contractions in China- the OECD emphasises – are being felt around the world, reflecting the key and rising role China has in global supply chains, travel and commodity markets”.

As far as Italy and Europe are concerned, the OECD projects a reduction in the anaemic growth already forecast. The Eurozone is projected to grow by 0.8% compared to the 1.1% initially expected, without major variations between the two scenarios, while for Italy zero growth is expected for the current year and a modest rebound ( + 0.5%). These are data that should make us think about effective responses and expansionary budgets on the investment side but which at the same time – La Repubblica emphasises – are still optimistic “if we consider that in these hours the American investment bank Goldman Sachs – predicting that the global coronavirus epidemic will have a significantly greater and more prolonged impact on Europe – caused the axe to fall on the prospects for Italian GDP, with a drop of 0.8% in 2020 (from + 0.2% pre-virus) followed by a rebound to + 1.2% in 2021 (from 0.7%) “.

The world trade front

The slowdown in international trade pointed out by the OECD has been widely stated to be one of the main reasons for the global crisis. The issue needs to be further investigated because it brings to light several issues regarding the fragility of numerous logistics chains in the context of an increasingly interdependent global economy.

The China crisis has been mentioned several times mainly on the export side and it is thought that the curbing of the global economic projection of the Dragon on the New Silk Road was the main issue. But China, with an internal market of 1.5 billion people and a growing hunger for raw materials, is also an increasingly important economy on the import side.

One of the few study centres to take this element into account in the preparation of its model is the Italian REF (Economic and Financial Research) which in its report “Economic Situation REF” reiterated the importance of the fact that “the Chinese imports have assumed particular significance, stabilising in the last few years at around 10% of world imports “. A cross-section of globalisation, which includes energy raw materials (17% of Chinese imports), and non-energy raw materials (22%), precious metals (4%), as well as an important share of technology-intensive manufactured products and capital (37 %), among which stand out the components of the high-tech industry, such as microprocessors, industrial machinery and defence and aerospace products.

“This aspect,” the report states, “is significant because obviously the risk arises that Chinese companies are unable to meet orders from abroad, leaving foreign customers without semi-finished products. The risk is that value chains that depend almost exclusively on the supply of products from China find themselves having to stop production due to lack of components”.

The trade crisis, according to Il Sole 24 Ore, “could concern containers of which more than 80% travel on board ships. The traffic in containers, used to ship semi-finished products and finished products of all kinds, has collapsed as never before in history: around the world, according to Alphaline, ships with a total capacity of over two million TEUs (Twenty-Foot Equivalent Unit, standard measurement of volume of around 38 cubic meters) have stopped “and almost 50% of the shipments expected in February have been cancelled, with a loss of $ 350 million per week for the companies in the sector.

The situation is therefore extremely delicate and requires attention. Now more than ever, governments must understand that it is by strengthening the real economy, employment and the internal demand of the countries affected by the coronavirus that the trend can be reversed. Managing the crisis simply by flooding the financial markets risks being counterproductive in the long term: economic contagion risks spreading through a knock-on effect and storm clouds are gathering but there is still time to avoid a severe shock. It suffices to see the signals that arrive daily from the economy and trade and bring numerous issues in the global economy to the surface, questions that have already been thorny for some time now: from the overheating of logistics chains to the excessive disconnect between the growth of the financial markets and the objective difficulties of the real economy.