The coronavirus is not simply a disease that needs a cure, it is not even only an infection that needs to be contained, but also a fear that haunts and a possibility that it can affect humans, animals and economies, virtually anything that humans live with or deal with. And so coronavirus is not a problem faced by China alone where it was probably detected first, but, it is a disaster for everyone around because we all live in a large and intricately connected global village. And China is no small a player in the world economy in terms of area, population, manufacturing or trade.
Recently, the Organisation for Economic Co-operation and Development (OECD) has warned that the outbreak could more than halve global economic growth this year. It is because China is one of the major growth drivers of the world economy and if it is infected with coronavirus, it is going to affect the other nations in more than one ways. According to OECD, the impact of the disease could lower its pre-corona global GDP growth rate projection of 2.9 percent to a meagre 1.5 percent in the post-corona scenario. As of now, it has been revised at 2.4 percent for the year 2020.
The Global Economic Growth Rate is already subdued
The global economy is already not in a healthy state. It is visibly stressed out and many nations are reeling under pressure. We know that an infection is likely to hurt more when the immune system is weak and may hurt longer when there are no readily available prescriptions to deal with it. No wonder if the world economy slows down, things could become worse as the ill effects of the downturn may have grave consequences for the global economy.
The worst part is that it is difficult to know when and how much the infection may spread to the various countries and how it may be contained for sure. This uncertainty and fear seems to be doing more harm than perhaps the disease itself. Although China is consistently reporting lesser number of new cases and many have reportedly been discharged either upon testing negative or after successful treatment, yet there are fresh cases reported from across several other countries and so one never knows what could be its potential impact on the world economy.
However, it has set the alarm bell for the monetary authorities and the policy makers around the globe to be proactive and to take urgent remedial actions to contain its impact on their respective economies. It is important to detect the corona positive cases as soon as they occur and to isolate these cases and treat them as early as possible in order that they do not infect others who may come in contact with them. Even OECD has talked about both the scenarios. If the effects of the virus outbreak are contained and effective policy actions are taken in the most severely affected economies, we can expect a growth rate of 3.25 percent in the year 2021. However, if the virus spreads out widely in other territories and could not possibly be contained, the growth rate could drop to even 1.5 percent in the year 2020.
From Travel to Supply Chains, China is a force to deal with
China is a huge supplier of both the consumption and investment goods around the world. It is an important constituent of the global supply chains. If production activity is suspended or closed down due to the corona-virus endemic, i.e. if it is not brought under complete control, it may lead to slackened economic activity in countries that import or export manufactured goods or raw material from or to China. Lack of demand for consumer and producer goods may dampen the credit off take in such economies such as what we see in India currently. According to the international Air Transportation Association, the airline industry may lose $29 billion in the wake of the corona aftermath.
Once recession sets in the global economy, the stock markets, which may be generally considered as the barometer of the intertwined world economy, may crash. Recently, $ 1.5 trillion is reportedly wiped out of the leading stock markets across the world. This could be the worst performance since the global meltdown in the year 2008.
Short Term Measures may at best bring Temporary Relief
The countries have to now think in terms of reducing reliance on the Chinese goods and improving indigenous production through appropriate fiscal and monetary policy initiatives. Short term measures such as stabilising the stock markets may not work in the long term, if things don’t improve in the worst scenarios.
It is, rather, time to think about long term policy initiatives that boost growth in the local economies. Investment sentiment has to improve even as the monetary policy reliefs are geared to be more favorable in order to improve the credit off take. Many countries may have to think in terms of reducing dependence on the Chinese economy in order to reduce huge trade deficits they are grappling with currently. If jobs increase in local economies, the investment sentiment may revive in such countries. It is more a sort of need of the hour as output growth rates are expected to plunge in China. A slowdown in the global economic growth rate would not help China either in the long run.
Fed Prescription for Viral Infection: Will it work?
Recently, Fed has reduced the interest rates by 0.50 percent in the wake of the growing investor concerns about the potential impact of the coronavirus. Earlier, the Reserve Bank of Australia had announced a cut of 0.25 percent in the interest rates to touch a historic low of 0.50 percent interest rate. The fed prescription is a welcome move and may give some respite to the dwindling stock markets. Yet its long term benefits would occur only if other countries, particularly in G20 and leading emerging economies follow the suit.
Further, monetary instruments alone may not help. They need to be supplemented by suitable fiscal, industrial and trade policies in respective economies on one hand and a well-coordinated effort at the global level, on the other. There is a need to find solutions to corona-virus problem and check its further spread across the globe. A disease hurts you more when you are weak and so you need to improve your immune system to fight it out.
To conclude, we must move towards a more balanced economic order in future where globalization means diffusion of economic power as countries have a diversified trade basket or strategic partnerships across the world. An economic order, where all countries coexist and none dominates is possible only when all the countries work together with the idea of “be local – go global”.