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OECD INTERIM ECONOMIC OUTLOOK

Coronavirus: the world economy at risk Laurence Boone OECD Chief Economist 2 March 2020 Access the underlying data :oe.cd/ieo-03-2020-handout-data http://www.oecd.org/economy/outlook/ ECOSCOPE blog : https://oecdecoscope.blog/


The economic situation was stabilising before Covid-19 GDP growth %, year-on-year

7 6 5 4 3 2 1 0

World

G20 Advanced

US

Euro area

Japan

G20 Emerging

China 2

Source: OECD Economic Outlook database.


OECD Interim Economic Outlook projections Real GDP growth

%, year-on-year. Arrows indicate the direction of revisions since the November 2019 Economic Outlook 2019 2.9

2020 2.4

2021 3.3

G20

2019 3.1

2020 2.7

2021 3.5

Australia

1.7

1.8

2.6

Argentina

-2.7

-2.0

0.7

Canada

1.6

1.3

1.9

Brazil

1.1

1.7

1.8

Euro area

1.2

0.8

1.2

China

6.1

4.9

6.4

Germany

0.6

0.3

0.9

India1

4.9

5.1

5.6

France

1.3

0.9

1.4

Indonesia

5.0

4.8

5.1

Italy

0.2

0.0

0.5

Mexico

-0.1

0.7

1.4

Japan

0.7

0.2

0.7

Russia

1.0

1.2

1.3

Korea

2.0

2.0

2.3

Saudi Arabia

0.0

1.4

1.9

United Kingdom

1.4

0.8

0.8

South Africa

0.3

0.6

1.0

United States

2.3

1.9

2.1

Turkey

0.9

2.7

3.3

World

downward by 0.3 pp and more

downward by less than 0.3 pp

no change

upward by less than 0.3 pp

upward by 0.3 pp and more

Note: Difference in percentage points based on rounded figures. The European Union is a full member of the G20, but the G20 aggregate only includes countries that are members in their own right. 1. Fiscal years starting in April. 3 Source: OECD Economic Outlook database; and OECD calculations.

3


Manufacturing appeared to have bottomed out New orders in advanced economies

Global industrial production growth % 6

Quarterly

Year-on-year

PMI

58

5

56

4

54

3

52

2

50

1

48

0

2016

2017

2018

Note: RHS: The last data point is February 2020. Source: OECD Main Economic Indicators database; Markit; and OECD calculations.

Manufacturing export orders Manufacturing all orders Services orders

2019

46

2017

2018

2019 4


Employment growth was also stabilising OECD employment growth

Global retail sales growth Quarterly

% 6

Year-on-year

5

2.0

4

1.5

3

1.0

2

0.5

1

0.0

0

-0.5

2016

2017

2018

Quarterly

% 2.5

2019

2012

2014

Year-on-year

2016

2018

Note: Quarterly series are annualised. LHS: Data for retail sales are used in the majority of countries, but monthly household consumption is used for the United States and the monthly synthetic consumption indicator is used for Japan. Data for India are unavailable. Source: OECD Economic Outlook 106 Database.

2019 5


ASSESSING THE ECONOMIC EFFECTS OF COVID-19

6


Economic channels Containment measures

Supply

Demand

Quarantines

Factory closures

Loss of confidence

Travel bans and restrictions

Cutbacks in service provisions

Business and tourism travels

Closure of public places

Supply chain disruption

Education and entertainment services 7


Covid-19 will have a larger economic impact than the SARS episode in 2003 China is a major commodity importer

China is more integrated in the global economy

Share of China in global demand for selected commodities

Share of China in world

% 18

2002

2018

60

16

50

14

40

12 10

30

8

Global FDI

Global tourists

Note: LHS: Estimates for global tourists are based on 2017 instead of 2019; estimates for global FDI are based on 2005/2018 instead of 2002/2019. Share of global GDP and trade in constant US dollars. Share of global FDI in current US dollars. Source: OECD Economic Outlook database; OECD Global FDI in figures (2019); World Bank Group (2019), Commodity Markets Outlook, October; and OECD calculations.

Crude oil

Global trade

Natural rubber

Global GDP

Lead

0

Zinc

2

Nickel

10

Copper

4

Aluminium

20

6

0

2000

%

2019

8


The drop in Chinese travellers will hit hard Travel services to China and Hong Kong-China, as a share of GDP 2018

% 1.2

% 8

Hong Kong - China

1.1

7

1.0 0.9

6

0.8

5

0.7 0.6

4

0.5

3

0.4 0.3

2

0.2

1 0

China

0.1 HKG

THA

0.0

NZL

AUS

SGP

ISL

JPN

CAN

HUN

FRA

CHE

USA

Note: Data for Singapore and Thailand are for spending by foreign tourists in the country. Data for Hong Kong-China are for 2017. Source: OECD Economic Outlook database; OECD Trade in Services by Partner Country; Eurostat; Singapore Tourism Board; and Ministry of Tourism and Sports, Thailand.

GBR

ITA

NLD 9


Supply chains are vulnerable Value added trade flows between China and key partners Computers, electronics and electrical equipment sector

Transport equipment sector

Value added export dependence to China, % of country’s sector output Value added import dependence from China, % of country’s sector output Share of world value added by the sector Note: 2015 data. *DAE refers to Dynamic Asian Economies: Chinese Taipei; Hong-Kong, China; Malaysia; Philippines; Singapore; Thailand and Vietnam. Source: OECD Trade in Value Added database; and OECD calculations.

10


The fall in Chinese demand will have important costs Contained outbreak scenario World GDP in 2020

% difference from baseline and contributions in % pts

0.0 -0.1 -0.2 -0.3 -0.4 -0.5

Demand Q1

Equity + Commodity prices Q2

Uncertainty Q3

Total Q4

Full-year impact on 2020 world GDP

0.5%

-0.6 -0.7 -0.8

Note: This simulation shows the impact of a 4% fall in domestic demand in China and Hong Kong-China in 2020Q1 and a 2% decline in 2020Q2, plus declines of 10% in global equity and non-food commodity prices in the first half of 2020, and a 10 bps rise in investment risk premia in all countries in the first half of 2020. All shocks are assumed to fade away gradually by early 2021. Source: OECD calculations using the NiGEM global macroeconomic model.

11


Costs are much higher if the epidemic spreads through Asia-Pacific and the Northern Hemisphere World GDP in 2020

Downside scenario

% difference from baseline and contributions in % pts

0.0 -0.4 -0.8 -1.2

Demand Q1

Equity + Commodity prices Q2

Uncertainty Q3

Total Q4

Full-year impact on 2020 world GDP

1.5%

-1.6 -2.0

Note: This simulation shows the impact of a 4% fall in domestic demand in China and Hong Kong-China in 2020Q1 and a 2% decline in 2020Q2, plus a 2% domestic demand fall in most other AsiaPacific countries and advanced Northern hemisphere countries in 2020Q2 and 2020Q3,plus declines of 20% in global equity and non-food commodity prices in 2020, and a 50 bps rise in investment risk premia in all countries in 2020. These shocks are assumed to decline gradually through 2021. Source: OECD calculations using the NiGEM global macroeconomic model.

12


The decline in global growth hitting all affected regions Regional impact of downside scenario Contributions to change in world GDP in 2020, % pts

China 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 -1.2 -1.4 -1.6 -1.8 -2.0

Other Asia-Pacific Q1

Europe

North America Q2

Commodity exporters Q3

Rest of the World

World

Q4

Note: This simulation shows the impact of a 4% fall in domestic demand in China and Hong Kong-China - in 2020Q1 and a 2% decline in 2020Q2, plus a 2% domestic demand fall in most other AsiaPacific countries and advanced Northern hemisphere countries in 2020Q2 and 2020Q3, plus declines of 20% in global equity and non-food commodity prices in 2020, and a 50 bps rise in investment risk premia in all countries in 2020. These shocks are assumed to decline gradually through 2021. Commodity exporters include Argentina, Brazil, Chile, Russia, South Africa and other non-OECD oilproducing economies. Source: OECD calculations using the NiGEM global macroeconomic model.

13


Loss of confidence can intensify financial stress Corporate credit defaults could rise

Financial volatility has increased

Corporate bond issuance in EMEs, 2018 USD billion

$800 Bn.

China

Implied oil price volatility

VIX

MOVE

120

Other emerging

100

600

80 400

60 40

200

Note: VIX refers to the Chicago Board Options Exchange Market Volatility Index. MOVE refers to the Merrill Lynch Option Volatility Estimate index. Source: OECD (2019), Corporate Bond Markets in a Time of Unconventional Monetary Policy; Balestra (2018); Thompson Reuters; and OECD calculations.

2019

2018

2017

0

2016

'19

2015

'15

2014

'10

2013

'05

2012

2000

2011

0

2010

20

14


GOVERNMENTS MUST ACT NOW

15


Policy options to address economic implications People

Firms

Macro policy

Increase resources to the health sector

Reduce or delay tax payments for most affected sectors

Expand liquidity to banks

Step up temporary cash transfers to vulnerable households

Expand liquidity and availability of credit to firms

Ensure monetary policy responds to extreme market conditions

Reduce public sector arrears to firms

Let automatic stabilisers fully work and boost public investment

Expand short-time work schemes

16


Policy coordination would provide the most effective stimulus GDP in median G20 economy

% difference from baseline and contributions in % pts Structural

1.4

Fiscal

Monetary

Confidence

Combined

1.2 1.0 0.8 0.6 0.4 0.2 0.0

Year 1

Year 2

Year 3

Long-run

Note: Scenario with all G20 economies simultaneously undertaking changes to fiscal, monetary and structural policies. Countries undertake additional debt-financed public expenditure of 0.5% of GDP for three years, monetary policy becomes more accommodative in economies with policy interest rates above zero (all countries excluding Japan, France, Germany and Italy) and productivityenhancing structural reforms raise total factor productivity by 1% after five years. Confidence is modelled by a 50 basis point reduction in investment and equity risk premia for two years. Source: OECD calculations using the NiGEM global macroeconomic model.

17


Key messages Covid-19 has hit people and livelihoods • Covid-19 (coronavirus) has disrupted people’s life and the global economy • Activity has slowed dramatically in China on the back of containment measures • Negative spillovers via tourism, supply chains, commodities, confidence are growing

The spread of coronavirus could intensify a global downturn • Weakened by trade and political tensions, the global economy is vulnerable • Containment measures and lower confidence would slow affected economies • Pressure on industries with structural difficulties (autos) or that are large employers (tourism)

Governments cannot afford to wait • Increase resources to the health sector and support the most vulnerable • Ensure liquidity buffers for affected industries worldwide • Coordinate health response, monetary and fiscal support across countries

18

Profile for OECD

Coronavirus: the world economy at risk, OECD Interim Economic Outlook March 2020  

Coronavirus: the world economy at risk, OECD Interim Economic Outlook March 2020