Economic effects of coronavirus outbreak | My Assignment Tutor

Economic effects of coronavirus outbreak (COVID-19) on theworld economyNuno FernandesFull Professor of FinanceIESE Business [email protected] and subject to revisions as new data is releasedRevised, April 13, 2020Version 2.0This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=35575041ContentsContents………………………………………………………………………………………………………………………… 1Executive summary: Global recession is almost inevitable …………………………………………………… 21. Mortality rates and economic impact are not correlated………………………………………………. 31.1- 1918 Global influenza ……………………………………………………………………………………………. 41.2- Ebola 2013-2016 …………………………………………………………………………………………………… 52. This time is different…………………………………………………………………………………………………. 52.1- Relevant business and economic news and data ………………………………………………………. 62.2- Comparisons with SARS are not valid ………………………………………………………………………. 72.3- The second quarter will be worse than the first………………………………………………………. 103. What we can learn from recent data ………………………………………………………………………… 103.1- Industry variation: Service hit hardest……………………………………………………………………. 103.2- Supply chains disrupted ……………………………………………………………………………………….. 123.3- Recent Chinese data ……………………………………………………………………………………………. 134. Stock market evidence ……………………………………………………………………………………………. 144.1- Markets around the world are significantly down …………………………………………………… 154.2- No sector is left untouched…………………………………………………………………………………… 164.3- Volatility is at historical highs ……………………………………………………………………………….. 175. Key assumptions in the forecasts ……………………………………………………………………………… 186. Main results …………………………………………………………………………………………………………… 206.1- The COVID-19 economic impact: mild scenario ………………………………………………………. 206.2- Estimated GDP growth for different countries………………………………………………………… 226.3- Other scenarios …………………………………………………………………………………………………… 23Shutdown of three months ……………………………………………………………………………………… 24Shutdown of 4.5 months …………………………………………………………………………………………. 257. Concluding comments: What lies ahead……………………………………………………………………. 27Main references, news articles, and other sources……………………………………………………………. 29This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=35575042Executive summary: Global recession is almost inevitableThis report discusses the economic impact of the COVID-19 crisis across industries, and countries.It discusses the economic channels through which economic activity will be impacted. And theasymmetric results across countries and industries. It also attempts a rough estimate of thepotential global economic costs of COVID-19 under different scenarios.The COVID-19 outbreak started in December 2019 in Wuhan city in China. It continues to spreadacross the world. At the time of the first draft of this report, almost 200,000 cases of the virushad been recorded worldwide. As of this current version, the total has risen to above onemillion. And more than 100,000 have died.While some countries have been able to treat the reported cases effectively, it is uncertain whereand when new cases will emerge. Every day more cases are reported, and new countries enterthe World Health Organization’s (WHO) list of areas where the virus has been reported. It seems,however, as if the cases reported from China have peaked, and are now falling. The oppositetrends are seen in Europe and America. Given the public health risk, the WHO has declared anemergency of international concern.In a strongly connected and integrated world, the impacts of the disease go way beyondmortality. As such, governments around the world have been preparing contingency plans, andaid packages to sustain their economies.In China, we have seen severe lockdowns. This has led to a decrease in consumption, andinterruptions to production. Overall, the functioning of global supply chains has been disrupted,affecting companies across the globe. Millions of people could lose their jobs over the comingmonths. In addition, every day we hear worrying news about more companies shutting downoperations, revising estimates, or announcing layoffs. Consumers have also changed theirconsumption patterns, resulting in shortages of many goods in supermarkets around the world.Global financial markets have registered sharp falls, and volatility is at levels similar, or above,the financial crisis of 2008/9.This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=35575043In the middle of all this turbulence, the International Monetary Fund (IMF) has developed somenew estimates for growth in 2020 (Feb 2020). In its revised estimates, the IMF expects China toslow down by 0.4 percentage points, as well as a slowdown of global growth by 0.1 percentagepoints. The OECD also revised their estimates in early March. It forecasted global economicgrowth falling to 2.4% for the whole year, compared to 2.9 % in 2019. I believe both estimateswill be proven wrong, and will likely be revised down in the coming months.There is still time for global policy makers to have a coordinated policy response to the virus andits economic impacts. However, time is running out. Post-World War II, the average recession hasincreased the unemployment rate by about 2 percentage points. We live now in a very differentworld compared with those that faced previous crises. Therefore, comparisons are dangerous,and prone to errors. This time, we are facing a combined demand and supply shock, andeconomic tools are limited. In addition, central banks exhausted their firepower during the goodtimes. There is almost no room for monetary stimulus to help sustain the coming risks. Overall,the potential impacts of this crisis are larger than any previously seen in history.This report first discusses why comparisons with prior events are not possible. Then, itsummarizes the existing news and reliable data that can guide any forecast. Within this, thisreport concludes that there will be a very asymmetric impact across sectors. Depending on theeconomic structure of each country, some will be more affected than others. For instance,countries with more service-oriented economies will be more affected, and have more jobs atrisk. This report then outlines some possible scenarios, and their impact on economic prospects.Finally, it concludes with a summary of the findings and some policy implications.1. Mortality rates and economic impact are not correlatedThere are many channels through which an infectious outbreak influences the economy. Thetraditional approach to evaluating the economic damages of an outbreak uses information ondeaths and illness to estimate the loss of future income due to death and disability. Losses ofThis preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=35575044time, income, and direct expenditure on medical care are also part of the traditional measuresof economic costs.This traditional health economics approach underestimates the true costs of the current crisis.We have seen that in prior infectious diseases for which there is no vaccine (e.g., SARS, HIV/AIDS,and pandemic influenza). However, the available evidence from these prior outbreaks providessome information that can help us start thinking about the full implications of COVID-19.Data from SARS, as well as the Spanish Flu from 1918, provides us with some idea of the economicshocks posed by the current outbreak.However, it is important to highlight the differences. We are facing a different shock here. In theCOVID-19 crisis, the evidence suggests there is no correlation between economic impact andmortality rates. The reaction of governments, companies, consumers and media, have all createda simultaneous demand and supply shock. At the date of this report, I believe the health risk isnot necessarily correlated with the economic risk to the global economy.1.1 – 1918 Global influenzaSome of the worst-case scenarios for the current pandemic are based on the global influenza of1918, which killed 40 million people worldwide in 1918 and 1919. Only the Black Death (14thcentury) has killed more people (roughly 60 million) over a similar time period. The 1918 globalinfluenza infected one third of the world population. If a similar contagion occurred today, witha much larger population, and with quicker travel times around the world, it could lead to morethan 80 million deaths. In addition to tragic levels of mortality, this pandemic caused panic, andseriously impacted the global economy and trade. Some believe that a repeat of the 1918/19 flupandemic could cost more than $4 trillion.A study by the U.S. Congressional Budget Office (2005) examined two scenarios of pandemicinfluenza for the United States. A mild scenario (attack rate of 20%; mortality rate of 0.1%) and amore severe scenario (attack rate of 30%; mortality of 2.5%). According to that study, the GDPThis preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=35575045contraction for the United States would be 1.5% for the mild scenario and 5% of GDP in the severescenario. Similarly, the World Bank has estimated that a global influenza akin to the one in 1918would cost the economy US$ 3 trillion, around 5% of gross domestic product (GDP). And in a mildscenario, the cost would be 2.2% of GDP.1.2- Ebola 2013-2016Given the uncertain nature of an influenza pandemic, comparisons with other recent outbreakshave been performed. Chief among them is the Ebola outbreak in Africa. This 2013–2016 Ebolavirus disease outbreak led to about 11,300 deaths.In terms of economic impact, there are estimates of:o US$ 53 billion loss from the economic and social impact of Ebola in West Africao 20% drop in Sierra Leone’s GDP in 2015This outbreak has also taught us, that even when the health impact of an outbreak is relativelylimited, its economic consequences can be devastating and long-lasting. As an example, Liberia’sGDP declined 8 percentage points from 2013 to 2014, even as the country’s overall death ratefell over the same period.2. This time is differentComparisons with other global crises, like the 2008 financial crisis, are not possible. This time weare facing a number of new challenges, which prevent simple comparisons with the past:o It is a global pandemico It is not focused on low-middle income countrieso Interest rates are at historical lowso The world is much more integratedo This current crisis is generating spillover effects throughout supply chainso We have simultaneously destruction of demand and supplyThis preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750462.1- Relevant business and economic news and dataThe above-mentioned facts can be seen in the light of recent business events. Unfortunately, theeconomic impact of the current health crisis is being felt across sectors and countries. This is asmall sample of relevant events over the past month:o Car manufacturers, such as Volkswagen and Ferrari, suspend production in Europeo Sectors affected by the lockdown—transport, entertainment, retail, hotels andrestaurants—account for a quarter of Italian GDPo Euro 2020, Tokyo Olympic Games, postponed to 2021o Tourist destinations like Paris, Madrid, Venice and Rome are desertedo Trade fairs and events are canceledo In the U.S., job losses reached an unprecedented high.o Cancellations of public gatherings and sporting eventso Cruise operators cancelling cruiseso Airlines have started by grounding their Airbus A380s fleets. Later, they grounded theirwhole fleeto Airlines asking employees to take two months unpaid leaveo NBA, football leagues, Formula 1 suspended until further noticeo Maersk canceled 50 sailings over coronaviruso More than 10 million people have already lost their jobs in the U.S.o Canada’s Cineplex Inc. is closing all of its 165 movie theatreso McDonald’s closes seating areas in the U.S.o Lufthansa reduces 90% of its long range flights and cancels more than 23000 flights untilthe end of Aprilo Media groups, and TV networks are facing sudden drops in ad revenueo Lockdown of Manila (13 million people in the metropolitan area)o Amazon and Facebook have issued lower estimates of ad revenueo Germany has offered companies “unlimited” loans to stop them from collapsingo Airbus suspended production in France and SpainThis preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=35575047o Gucci and Hermes, luxury goods companies, are closing all their manufacturing siteso Italian shipyard Fincantieri has asked its workers to use their annual vacation timeo 145 drivers have been laid off at the Port of Los Angeles, as ships from China stoppedarrivingo Norwegian Air to cancel 85% of flights and lay off 90% of staffo German tourism giant TUI has made a request for state aido MGM closes all U.S. casino resortso Switzerland is open only to citizens, residents, and commuterso Trading on the NYSE halted several times over the past month, as circuit breakers keptbeing brokeno Swiss watch manufacturers are facing disrupted supplies of componentso Borders are being reinstated within the EU2.2- Comparisons with SARS are not validIn 2002/3 the outbreak of severe acute respiratory syndrome (SARS) spread from Guangdong, inChina, to other Asian countries. By the time it was contained (summer of 2003), more than 8,000people had been infected, and over 900 people had died (WHO). It led to a 0.5 to 1 percentagepoint reduction in China’s growth in 2003. Overall, the cost of SARS to the global economy isestimated to have been $54 billion, according to the World Bank.There is still plenty of uncertainty about COVID-19. The available data suggests it is morecontagious than SARS, similar to the Avian flu. On the other hand, COVID-19 has a much lowermortality rate (between 2-4%) compared to SARS (10%). And both are much lower than the Avianflu (60%).Despite sharing similarities from a medical perspective (both are coronavirus infections), theireconomic impacts are bound to be very different. As such, comparisons with SARS have to beproperly adjusted:o China represented 3% of the world economy in 2003. Now it is above 16%. Nowadays, anyshock to Chinese activity is strongly felt in markets around the world, in all different sectors.This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=35575048o China is currently the world’s largest importer and exporter. In many individual industries,China is the main supplier of parts. So, countries that rely on China for intermediate inputsare strongly affected. Companies like Apple and Nike have already admitted being affectedby this.o China is also, in many industries, the main purchaser of global goods and services.o Since 2014, China has been the largest source country of international tourism (WorldTourism Organization). That means that many countries exports of services dependsubstantially on Chinese consumers.o The world economy is much more integrated than it was 15 years ago. So economic disruptionin one location has much larger spillover effects.o China represented approximately 40% of the world growth in 2019. In 2003, China slowingdown 1% of its growth was not noticeable. Nowadays, it has a much bigger impact in globalgrowth.Figure 1: China’s role in world’s exportsThis preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=35575049Figure 2: China’s role in world’s importsFigure 3: China’s contribution to global GDPThis preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750410These graphs clearly show that any comparison with 2003 is not relevant. China’s role in theglobal economy has grown significantly since then. And thus, spillover effects occur through tradeand supply chains (see sections 2.1- Relevant business and economic news and data and 3.2-Supply chains and global trade are disrupted).2.3- The second quarter will be worse than the firstThe recent evidence shows China’s GDP has decreased in the first quarter. Since China isapproximately 16% of the global economy, that is bad news for the whole world. Prior to thecrisis, the estimated GDP growth in China for the first quarter of 2020 was 6%.As of today, we are entering into a global pandemic scenario. Over the past month, all over theworld, we have started to have restrictions put on public life. Countries followed the example ofChina: lockdowns, mobility restrictions, massive quarantine hospitals, increase in public healthmeasures, protection of the elderly, etc. There are also limits on travel, companies are sendingtheir workers home, airplanes are grounded, etc.The reality is that most western countries are 1.5-2.5 months behind China in terms of theoutbreak. They are also behind in terms of the implementation of corrective measures, and it isdoubtful whether the confinement efforts will be as successful as in China.Therefore, it is guaranteed that the second quarter will be worse than Q1 in the majority ofcountries worldwide. Recent evidence from the end of Q1 confirms this. In the U.S., more jobswere lost (more than 10 million) during the last two weeks of March, than during the 2008-2010crisis. In the last week of March, 6.7 million U.S. workers filed for unemployment benefits –previous maximum was less than 700.000….3. What we can learn from recent data3.1- Industry variation: Service hit hardestThis preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750411Several countries are in lockdown mode, for an indefinite time. People are working from home,or simply not working. We are facing travel bans, sporting event cancellations, and prohibitionson gatherings. People in Europe are not using public transport and are avoiding public spaces,such as restaurants, shopping centers, and museums.All sectors will be affected. There is evidence that discretionary spending by consumers hascollapsed. However, according to the data shown in previous sections, the consequences ofCOVID-19 will not be equally distributed throughout the economy.The problems are particularly bad in hospitality related sectors. Indeed, the global travelindustry—from airlines to cruise companies, from casinos to hotels—is facing reductions ofactivity of more than 90%. As described in previous sections, tourist destinations are deserted,airlines are grounding fleets and firing staff, trade fairs and cruises are being cancelled, hotelsand casinos closing all operations….Besides these, there are other businesses that rely on tourism and will suffer spillover effects. Ontop of travel restrictions and quarantines, companies are cancelling travel and meetings, andgovernments have closed borders. Additionally, it is well known that Chinese tourists are theworld’s biggest spenders. Figure 4 shows the distribution of travel and tourism’s totalcontribution to GDP in different countries.Figure 4: Tourism’s importance in different countriesSource: World Travel & Tourism CouncilThis preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750412A substantial drop in travel affects many world destinations substantially. Obviously, countrieslike Greece, Portugal, Mexico or Spain that are more reliant on tourism (more than 15% of GDP)will be more affected by this crisis.Despite globalization, much activity remains local. Many of the services we use on a daily basisare not traded and remain locally sourced. Here too, there is a strong negative impact to theeconomy. As people cancel appointments at the dentist, postpone their haircuts, do not go outfor their weekly meal, or wait to put their house on the market, this is a strong blow to serviceoriented economies. Indeed, in service sectors, the majority of the lost output is never going tobe recovered. If you are thinking of buying a mobile phone or a microwave, you are likely goingto wait and buy that product later (assuming this shock is temporary and you still have a job andavailable income when it’s over). However, if you do not go out to restaurants for your weeklydinner during this shut-down, it is very unlikely that you will start to have dinner out every daywhen the COVID-19 crisis disappears, to make up for the “lost dinners.” Nor will you cut your hairtwice in the same week.3.2- Supply chains and global trade are disruptedSupply chain networks is another channel through which the COVID-19 negatively impacts theglobal economy. As evidence from different markets confirms, the functioning of global supplychains has been disrupted by the current crisis. And this is generating spillover effects throughoutdifferent levels of supplier networks.Global trade in 2020 will fall in every region of the world, and will affect all sectors of theeconomy. This will impact countries that are strong exporters (no output for their localcompanies), but also those that are importers (lack of raw materials). The World TradeOrganization (WTO) expects global trade to fall up to 32% this year due to the coronaviruspandemic.Car companies are shutting operations for lack of parts. This is happening in most industrialsectors. Even in luxury goods, like Swiss watches, manufacturers are facing disrupted supplies ofcomponents.This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750413The disruption to supply chains will increase the cost of business for manufacturing companies.Companies—like toy manufacturer Hasbro, which source almost 70% of its products fromChina—are suffering. As factories shut down in China and transportation routes collapse, it hasbeen increasingly difficult for a company like Hasbro to get its products to market.According to the U.S. Institute for Supply Management, 75% of companies report disruptions intheir supply chains. Also according to this survey, lead times have doubled for many U.S.companies. In addition, there have been shortages of raw materials and final products. This is allexacerbated by the shortage of air and ocean freight options to move products around the world.The damage is real. Of course, this is questioning the just-in-time strategy of many companies,who try to minimize inventories at all costs. The trade-off between efficiency and resilience hasbeen clear now to many managers. Understandably, some companies prefer to have facilities (orsuppliers) in various countries as a risk minimization strategy, even if this means a slightly higherthan-average cost.3.3- Recent Chinese dataChinese officials said that the peak of the pandemic has passed. However, most believe it willtake months before China’s economy returns to normal. The spread of the virus around the worldis also creating fears of a global recession, which further decreases the demand for Chineseproducts.The most recent data from the National Bureau of Statistics showed how the majority of analystswere wrong and underestimated the impact of the crisis. This recently released data indicatedthat industrial output fell, in the first two months of 2020, by more than 13.5%. The medianforecast of analysts polled by Reuters predicted a gain of 1.5%.Similarly, investment in fixed assets fell 25% year-on-year. Here, analysts were forecasting 2.8%growth (compared with 5.4% growth in the prior period).This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750414Chinese consumers respected the lockdowns and their authorities’ recommendations. They werefearful of the virus, and thus moved away from shopping malls, restaurants and movie theatres.As a result, retail sales collapsed by 20%, compared with a forecast of 0.8% by analysts (and veryfar from the +8% growth in December).Data released on March 16, 2020 indicated that 5 million people in China lost their jobs in Januaryand February (CNBC). But it’s likely the figure will grow to more than 9 million (EconomistIntelligence Unit).Infrastructure investment was also down in the first two months (30% from a year earlier). Thisis despite local governments’ paying for a number of projects through their bonds sold since thestart of the year ($140 billion).It is important to know that 2020 also marks the end of China’s current five-year developmentplan. Within this plan, there was an objective of doubling the size of the Chinese economy by2020 (relative to 2010). In order to do that, growth above 6% was needed for 2020.The authorities are trying to maintain stable growth expectations through economic stimulus.However, businesses’ capital expenditures and consumer spending can ultimately createchallenges in pushing for the target GDP level. Indeed, even as the economy starts to work again,three months after the outbreak, businesses are still not operating at normal capacity. As anexample, the average Chinese SME is at a 60% work rate.It is also now clear that the COVID-19 has spread globally, which will dampen demand globallyand mean less demand for Chinese products.4. Stock market evidenceStock markets collapsed in March 2020. Most stock indices around the world have registeredtheir biggest one-day falls on record. For example, the Dow Jones Index registered the worst everone-day fall (2,977 points on March 16, 2020). And several well-known companies have seentheir share prices fall by more than 80% in a few days.This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750415Figure 5: S&P 500 performance over the last 4 yearsSource: Reuters EikonFigure 5 shows the performance of the U.S. stock market. After a strong bull market, the index isnow 30% below its peak. At the current valuation levels, we are back to the pre-Trump era, atlevels last seen in early 2016. And the U.S. is not alone.4.1- Markets around the world are significantly downFigure 6 shows the year-to-date decreases in stock markets for selected countries. The U.K. andGerman stock markets have seen even worse performances than the U.S. (U.K. -37%, Germany –33%).Figure 6: Global stock markets’ performances in 2020Source: Reuters EikonThis preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750416Figure 7 shows the top 10 worst-performing stock markets. Brazil is down by 48%, Poland by 38%.Figure 7: Top 10 negative performances – Global stock markets’ performances in 2020Source: Reuters Eikon4.2- No sector is left untouchedFigure 8: World stock markets – Different sectors returns in 2020Source: Reuters EikonThis preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750417Figure 8 shows the year-to-date stock returns for industries that have been hit particularly hardsince the COVID-19 outbreak. Oil, gas, and coal firms lead the negative returns (on average 50%below start-of-the-year prices) driven largely by a plunge in oil prices and a decline in globalconsumption. As expected, travel & leisure (including hotels, restaurants, etc.), aerospace,mining, banks, and media are all examples of sectors that have fallen by more than 30%.No sector has been left unharmed by this collapse in stock prices. Even traditionally stable sectors(like utilities, tobacco and pharmaceuticals) are all down by 20% or more.4.3- Volatility is at historical highsThe implied volatility of equity markets is often used as an indicator of how risky the currentenvironment is—and how uncertain the future is. For instance, the VIX index is commonlyreferred to as the “fear index.” It is based on the traded prices of options on the S&P 500 indexand represents the market expectation of stock volatility over the next 30 days.Figure 9: Implied volatility given by the VIX index.Source: http://www.cboe.com/micro/vix/historical.aspxThis preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750418Figure 9 shows the implied volatility in markets. The VIX long-term average is approximately 20%.However, it can clearly be seen that it rose significantly in the aftermath of the 2008/9 financialcrisis, thus reflecting investors’ uncertainty about the future. Nowadays, it is actually above thoselevels.All prior crisis have been triggered by other events (sovereign debt crisis, LTCM default, dot-combubble, banking crisis, program trading collapse, political events, wars, etc.). And in many pastcrises, central banks had at their disposal tools to prevent further damages.None of the previous examples were in periods where the starting point of interest rates was solow (and in some cases negative). This could raise concern in the markets that there is little roomfor an effective policy response.5. Key assumptions in the forecastsIn this uncertain environment, it is difficult to forecast the economic impact of the COVID-19crisis. As explained above, there is no historical benchmark that we can use directly. Indeed, noprior crisis has started like this: a health event, global, that influences supply and demandsimultaneously, in a period when central banks have no firepower left (due to the zero ornegative interest rates already in place). In any case, we need to use available data to the bestextent possible in order to formulate key assumptions in the forecasting model.The yearly GDP of a country is split, ignoring seasonality, into months. We then need assumptionsas to the duration of the current shutdown of economic activity. In the base scenario, thesignificant shutdown of economic activity is assumed to last from mid-March to mid-May. Thatis more or less the duration of the toughest control measures in China. And as of the date of thisreport, several countries have announced complete lockdowns until the end of April. In thisscenario, May is then a gradual recovery period. This is the base assumption for the majority ofsectors. But for those that are tourism-related, it is assumed that the recovery phase will take abit longer (May and June). After the recovery period, that economic activity returns to the normalexpected path. That is, under the base case scenario, we will assume that, for instance, theThis preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750419number of cars sold in August 2020 will return to the amount forecasted for the month back inearly 2020.At the time of this report, the duration of the current crisis is unknown. These assumptions couldlead to a mildly conservative scenario, as there is no guarantee economic activity will resumewith normality once the containment measures are removed. Indeed, given the significant shockto labor and product markets during the crisis months, with some probability, the post-crisismonths will be below the expectations set prior to the crisis. In our model, we are ignoring this(more negative) hypothesis.To base several estimations, we also use data from previous sections, on the Chinese and globaleconomies, global trade, plus high-frequency data from different sources, including sectorspecific impacts. The results are also calibrated with the reduction in consumption expenditureduring the SARS outbreak in China. Moreover, our model is further calibrated using the availabledata for China in the first months of 2020, in terms of its consumption, production, investment,retail sales, etc., during the lockdown months. This may lead to an underestimation. Indeed,Chinese consumers are heavy users of e-commerce. This means that in countries where ecommerce is less developed, the impacts on consumption may be higher.For each country, the model uses GDP decomposed into its’ different economic sectors. Duringthe crisis months, it is assumed that service-oriented sectors will be more impacted thanagriculture or industry. As explained in prior sections, with fewer tourists and lower consumptionoverall, airlines, retail, hospitality and entertainment sectors are all expected to suffer greatlyfrom the outbreak. Stock market data in previous figures is consistent with this assumption, too.Overall, this suggests that the economic cost of a recession are unequally distributed. Given thedifferent industrial composition of countries, impacts will be felt differently around the globe.For instance, the model assumes that countries that have a larger tourism sector (as a % of GDP)will be more severely affected than countries that are more industrial focused. Given thedocumented disruption to trade flows, the model also assumes that countries more reliant onexports will suffer disproportionally more.This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750420The model does not consider direct and indirect health costs, and so may underestimate the trueeconomic damage. In reality, shocks to the labor supply in each country will occur. And they willvary with the mortality rate due to infections and delays in returning to work for the infected.There will also be absenteeism from work due to family members who are infected. Finally, themodel does not include possible spillovers to the financial sector. If a significant disruption to thefinancial sector occurs, this will obviously impact firms with high levels of financial dependence.6. Main results6.1- The COVID-19 economic impact: mild scenarioTable 1 shows the economic shock posed by the current COVID-19 crisis (and a confidenceinterval), expressed as a percentage of GDP for each country. They provide an estimate of theoverall economic cost of the crisis under many assumptions (previous sections). Chief amongthem, in this scenario, the shutdown is assumed to be 1.5 months, with May being a gradualrecovery month.In the base scenario, in which the economic situation would be normalized by the end of May,the economic impact of the crisis ranges from 3.5 to 6% depending on the country. For instance,in the U.S., the crisis is expected to cost nearly 4% of its GDP. Overall, for all countries analyzed,an average economic impact of -4.5% of GDP is expected (median = -4.4%). The model takes intoaccount the different compositions of GDP in different countries. For instance, the higher theweight of tourism, the higher the impact of the crisis. In addition, supply chain disruptions, and asteep fall in global trade, exert further pressure on countries highly dependent on foreign trade.This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750421Table 1: Economic impact (% of GDP) – 1.5 months scenario Economic Impactconfidence marginArgentina-4.3%[from -5.7% to -3.0%]Australia-4.4%[from -5.8% to -3.1%]Austria-5.5%[from -7.1% to -3.9%]Belgium-4.3%[from -6.0% to -2.6%]Brazil-3.9%[from -5.3% to -2.7%]Canada-3.9%[from -5.3% to -2.5%]China-4.3%[from -5.6% to -2.9%]Czech Republic-4.6%[from -6.3% to -2.9%]France-4.3%[from -5.7% to -2.9%]Germany-4.8%[from -6.3% to -3.2%]Greece-6.2%[from -7.7% to -4.7%]India-4.0%[from -5.3% to -2.7%]Ireland-4.8%[from -6.8% to -2.8%]Italy-5.0%[from -6.4% to -3.5%]Japan-3.6%[from -4.9% to -2.3%]Mexico-5.4%[from -6.9% to -3.9%]Netherlands-4.2%[from -6.0% to -2.5%]Norway-4.4%[from -5.9% to -3.0%]Poland-3.9%[from -5.4% to -2.3%]Portugal-5.9%[from -7.5% to -4.4%]Russian Federation-3.6%[from -5.0% to -2.2%]Saudi Arabia-4.4%[from -5.8% to -2.9%]South Africa-4.3%[from -5.7% to -2.9%]South Korea-3.8%[from -5.3% to -2.3%]Spain-5.2%[from -6.7% to -3.7%]Sweden-4.5%[from -6.1% to -3.0%]Switzerland-4.6%[from -6.2% to -3.0%]Turkey-4.6%[from -6.1% to -3.2%]United Kingdom-4.5%[from -6.0% to -3.1%]United States-3.8%[from -5.1% to -2.5%] This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3557504226.2- Estimated GDP growth for different countriesIn this section, we compute the expected GDP growth for each country under the base scenario.Table 2Table 2: shows the results.Table 2: Estimated GDP growth in 2020 (and confidence margin) – 1.5 months scenario Growth in GDPconfidence marginArgentina-5.0%[from -6.4% to -3.7%]Australia-2.2%[from -3.6% to -0.8%]Austria-3.8%[from -5.4% to -2.2%]Belgium-3.0%[from -4.7% to -1.3%]Brazil-1.9%[from -3.2% to -0.6%]Canada-2.1%[from -3.5% to -0.7%]China1.6%[from 0.2% to 2.9%]Czech Republic-2.0%[from -3.7% to -0.3%]France-3.0%[from -4.5% to -1.6%]Germany-3.5%[from -5.1% to -2.0%]Greece-3.9%[from -5.5% to -2.4%]India3.1%[from 1.7% to 4.3%]Ireland-1.3%[from -3.3% to 0.7%]Italy-4.5%[from -5.9% to -3.0%]Japan-3.1%[from -4.5% to -1.9%]Mexico-4.1%[from -5.6% to -2.6%]Netherlands-2.6%[from -4.3% to -0.9%]Norway-2.0%[from -3.5% to -0.5%]Poland-0.8%[from -2.3% to 0.7%]Portugal-4.3%[from -5.9% to -2.8%]Russian Federation-1.7%[from -3.1% to -0.4%]Saudi Arabia-2.2%[from -3.7% to -0.8%]South Africa-3.2%[from -4.6% to -1.8%]South Korea-1.6%[from -3.0% to -0.1%]Spain-3.4%[from -4.9% to -1.9%]Sweden-3.1%[from -4.6% to -1.6%]Switzerland-3.3%[from -5.0% to -1.7%]Turkey-1.7%[from -3.1% to -0.3%]United Kingdom-3.1%[from -4.5% to -1.7%]United States-1.7%[from -3.0% to -0.4%] This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750423On average, for all countries analyzed, the expected GDP growth in 2020 is -2.5% (median = –2.8%). The expected GDP growth is computed taking into account the (pre-crisis) expected 2020GDP growth for each country (IMF end-2019 estimates) and the above-mentioned economiccosts of the COVID-19 crisis (Table 1, 1.5 months scenario). For instance, France, was previouslyforecasted to grow by 1.3% in 2020. Taking into account the economic impact of the crisis (-4.3%),the estimated growth rate of the French GDP is -3%.The U.S. is expected to enter in a recession, with a GDP growth of -1.7%. It seems inevitable nowthat the economic downturn due to the coronavirus will put an end to the longest-runningexpansion in U.S. history.Once again, the impact of the current crisis will be different around the world. China will, in thisscenario, still have a positive growth of GDP (pre-crisis 6%, now less than 2%). On the other hand,most European countries will face significant recessions. Pre-crisis, European countries were notexpected to grow much. And now, they see contractions of their GDP of -3% to -4%. Judging fromprior recessions, a decline in GDP of this magnitude will significantly increase unemployment,and public deficits. Overall, this scenario leads, for these countries, to an average growth in 2020of -2.5%. This is substantially below the close to +3% growth rate seen in 2019.The estimates in this section assume that, once the containment measures are removed,economic activity returns to normality. It seems however possible that the economic pain will goon for longer than the containment period. Having imposed bans and restrictions, governmentsand public-sector bodies will be extremely cautious about removing them, and possibly, willremove them gradually, for certain sectors/activities only. Also, given the potential shock to laborand product markets during the crisis months, it is possible that the post-crisis months will bebelow the expectations set prior to the crisis. In our model, we are ignoring this (more negative)hypothesis.6.3- Other scenariosAt the time of this report, the duration of the current crisis is unknown. Moreover, as of the dateof this report, several countries have announced complete lockdowns until the end of April,This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750424beginning of May. This means the results of sections 6.1 and 6.2 may be conservative, as there isno guarantee economic activity will resume with normality in May.Shutdown of three monthsThe following table provides estimates of the impact if the crisis continues until mid-June. Witha gradual recovery of economic activity until early-July.Table 3: Estimated GDP growth in 2020, assuming shutdown lasts 3 months Growth in GDPconfidence marginArgentina-8.5%[from -10.8% to -6.3%]Australia-5.8%[from -8.1% to -3.5%]Austria-8.1%[from -10.8% to -5.4%]Belgium-6.8%[from -9.7% to -3.9%]Brazil-5.2%[from -7.4% to -3.0%]Canada-5.5%[from -7.9% to -3.1%]China-1.9%[from -4.2% to 0.3%]Czech Republic-5.9%[from -8.8% to -3.1%]France-6.6%[from -9.0% to -4.2%]Germany-7.4%[from -10.0% to -4.9%]Greece-8.6%[from -11.1% to -6.1%]India-0.2%[from -2.5% to 2.0%]Ireland-5.5%[from -8.8% to -2.2%]Italy-8.4%[from -10.9% to -6.0%]Japan-6.3%[from -8.5% to -4.1%]Mexico-8.3%[from -10.8% to -5.8%]Netherlands-6.3%[from -9.3% to -3.4%]Norway-5.7%[from -8.2% to -3.2%]Poland-4.2%[from -6.9% to -1.6%]Portugal-8.8%[from -11.4% to -6.3%]Russian Federation-4.9%[from -7.3% to -2.6%]Saudi Arabia-5.9%[from -8.4% to -3.4%]South Africa-6.8%[from -9.2% to -4.4%]South Korea-4.9%[from -7.4% to -2.4%]Spain-7.5%[from -10.0% to -5.0%]Sweden-6.8%[from -9.4% to -4.3%]Switzerland-7.2%[from -10.0% to -4.5%]Turkey-5.4%[from -7.8% to -3.0%]United Kingdom-6.8%[from -9.2% to -4.4%]United States-5.0%[from -7.2% to -2.8%] This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750425Overall, this second scenario leads to a contraction in GDP in all countries. On average, for allcountries analyzed, the expected GDP growth in 2020 is -6.2% (median = -6.3%). Once again, theimpact of the crisis will be different around the world. If extreme COVID-19-related measures lastuntil the end of June 2020, the U.S. will see its GDP fall by 5%. Germany, Greece, Italy, Portugaland Spain growth will see their GDP decline by -7% or more. On average, each additional monthof crisis costs 2.5-3% of global GDP.Shutdown of 4.5 monthsTable 4 looks at a more extreme scenario where the shutdown lasts until the end of July. With agradual recovery of economic activity occurring in August.In this more extreme scenario, we would face some of the most challenging economic conditionsever. No country would be left unharmed. The average decline in GDP would be close to 10.4%(median = -10.7%). As expected, countries that are highly reliant on tourism are even moreaffected in this scenario, where the summer is almost entirely lost. Similarly, countries highlydependent on foreign trade are more negatively affected. And the decrease in GDP could, insome cases, be higher than 12%.This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750426Table 4: Estimated GDP growth in 2020, assuming shutdown lasts 4.5 months Growth in GDPconfidence marginArgentina-12.4%[from -16.6% to -9.1%]Australia-9.8%[from -14.1% to -6.3%]Austria-13.1%[from -18.0% to -8.9%]Belgium-11.3%[from -16.4% to -6.5%]Brazil-8.8%[from -13.0% to -5.5%]Canada-9.2%[from -13.6% to -5.5%]China-5.8%[from -10.0% to -2.4%]Czech Republic-10.6%[from -15.6% to -5.8%]France-10.6%[from -15.0% to -6.9%]Germany-11.9%[from -16.6% to -7.9%]Greece-13.8%[from -18.6% to -10.0%]India-3.8%[from -8.0% to -0.5%]Ireland-10.8%[from -16.3% to -5.0%]Italy-12.9%[from -17.4% to -9.2%]Japan-9.7%[from -13.8% to -6.4%]Mexico-13.0%[from -17.7% to -9.2%]Netherlands-10.8%[from -15.9% to -6.0%]Norway-9.9%[from -14.4% to -6.0%]Poland-8.2%[from -12.9% to -4.0%]Portugal-14.0%[from -18.8% to -10.0%]Russian Federation-8.5%[from -12.8% to -4.9%]Saudi Arabia-10.0%[from -14.5% to -6.1%]South Africa-10.8%[from -15.2% to -7.2%]South Korea-8.7%[from -13.2% to -4.8%]Spain-12.1%[from -16.7% to -8.3%]Sweden-11.2%[from -15.8% to -7.1%]Switzerland-11.8%[from -16.6% to -7.3%]Turkey-9.6%[from -14.0% to -6.0%]United Kingdom-11.0%[from -15.4% to -7.3%]United States-8.5%[from -12.6% to -5.3%] This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=3557504277. Concluding comments: What lies aheadThe COVID-19 crisis spread rapidly throughout the world last month. We are facing a totally newtype of crisis. In this case, the health risk (actual mortality and infection rates) is not necessarilycorrelated with the economic risk to the global economy. Historically, global trade has allowedcountries to share risk. This time, this channel is not likely to help much. This is a global shockwhen the world is much more integrated. Interest rates are at historical lows, and the currentcrisis is also generating spillover effects throughout supply chains.A global recession now seems inevitable. But how deep and long the downturn will be dependson the success of measures taken to prevent the spread of COVID-19, the effects of governmentpolicies to alleviate liquidity problems in SMEs and to support families under financial distress. Italso depends upon how companies react and prepare for the re-start of economic activities. And,above all, it depends on how long the current lockdowns will last.At the date of this report, the duration of the lockdown, as well as how the recovery will takeplace is still unknown. That is why several scenarios are used. In the base scenario, GDP growthwould take a hit, ranging from 3-6% depending on the country. As a result, in the sample of 30countries covered, we would see a median decline in GDP in 2020 of -2.8%. In other scenarios,GDP can fall more than 10%, and in some countries, more than 15%.Figure 10: Estimated GDP growth in 2020 under the different scenarios (Median) -2.8%-6.3% -10.7%1.5 months3 months4.5 monthsThis preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750428The results suggest that on average, each additional month of crisis costs 2.5-3% of global GDP.The economic costs of a recession are unequally distributed. We already know many of the mostaffected sectors. Also, based on prior crises, it seems that younger and less educated workerswill, unfortunately, be more likely to lose their jobs.No one can accurately predict the final financial damage from COVID-19. This obviously dependson timing, the severity of the pandemic into future weeks/months, and countries’ policyresponses. Also, hopes of a coronavirus vaccine mount, which would be welcome news. If theongoing crisis lasts until the end of the summer, the global economy faces the gravest threat seenin the last two centuries.This preprint research paper has not been peer reviewed. Electronic copy available at: https://ssrn.com/abstract=355750429Main references, news articles, and other sources Amaro, S. 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