Red alert for the global economy

KShort hope for improvement, but then a dark diagnosis – this is how the week starts on the stock exchanges and for the global economy. The leading German index Dax started the day with a tailwind, the hope of interest rate cuts in the United States helped the Dax to gain. At noon, however, he plummeted into the red. After losing 12 percent the previous week, concerns about the effects of the coronavirus cost the Dax another 1.1 percent until the afternoon.

The new setback was triggered, among other things, by a calculation by the Organization for Economic Development and Cooperation (OECD). It cut its growth forecast sharply on Monday morning. In its central scenario, it believes it is possible to reduce the growth of the global economy from 2.9 to 2.4 percent this year. However, this presupposes that the virus no longer spreads noticeably from now on. However, if the development that China experienced hit the entire Asia Pacific region and the northern hemisphere, growth would halve to 1.5 percent. “And that’s not even the worst scenario, because the southern hemisphere could also be affected,” said OECD chief economist Laurence Boone. A recession is a real risk in the euro area, Japan and the United States.

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The OECD figures 0.5% of the world’s GDP per coronavirus

The epidemic ofCoronavirus Covid-19 has led the Organization for Economic Cooperation and Development(OECD) to clearly review downward its forecasts of growth in the world economy. The Paris-based body figures the 0.5 percent drop in GDP in 2020 due to the impact of the outbreak in many sectors of activity that reflect China’s growing role in a globalized market.

If last November the OECD predicted a growth of 2.9% – confirming the entry into a deceleration phase – in the report presented this Monday under the title ‘Coronavirus: the world economy in dangerit lowers it to 2.4% in the best scenario, that is, assuming that the peak of the epidemic in China and the rest of the affected countries is contained in the first quarter of 2020.

In the worst case scenario, if the virus spreads causing a domino effect in the economies of the Asia-Pacific region and the most developed in the northern hemisphere,world GDP could plummet to 1.5%and bring Japan or the euro zone to recession.

The club of developed countries reduces the growth prospects of theChina, which will suffer a contraction of 0.8%and it will fall below 5% this year before recovering 6% in 2021. In the case of the euro zone, the expansion will remain at 0.8%, three tenths less than in November forecasts.

The OECD warns thatthe negative impact of the coronavirus on trust, financial markets, the transport sectorand in the chains of distribution of products it forces to review downward the growth in all the economies of the G20 and especially those more connected with China, such as Korea, Japan or Australia, where it calculates that the impact of the crisis will contract the GDP a 0.3%, 0.4% and 0.5%, respectively.

The crisis has hadimpact on global distribution chains, a lower demand for imports of goods and services and a great fall in tourism, both regionally and internationally, as well as work trips. To all this is added the fear of financial markets and distrust of consumers and businesses.

If you compare the current coronavirus epidemic with similar episodes experienced in the past, such as SARS in 2003, the main difference is thatthe global economy is now more interconnectedand China is much more relevant in world production, commerce and tourism. “This magnifies the collateral economic effects of the shock in China,” the study says. “Even if the peak of the outbreak is short-lived and production and demand recover in the coming months, it will substantially undermine global growth in 2020,” the agency warns.

Tourism Impact

The decline in Chinese production has been quickly noticed throughout the world by the role of the Asian country in the supply of intermediate goods, especially computers, electronic components, pharmaceuticals and transportation equipment.

Theweakness of the manufacturing sector would worsen if it takes to recoverproduction taking into account the time required for the distribution of goods. Restrictions affecting travel and cancellations of visits, flights, fairs and events are also having severe consequences in many sectors and the OECD warns that this “can go on like this for a while.”

TheChinese tourism decline is a negative fact for the sector, which begins to notice its effects outside the region. In addition, the spread of the virus would have consequences for the employment of the main OECD economies.

Stimulus measures

Faced with this scenario and in a global context of great uncertainty,the OECD recommends macroeconomic stimulus measuresto regain confidence and low interest rates that contribute to maintaining demand in the economies most exposed to the epidemic. In Asia, he believes that there is scope for fiscal flexibility but not in Europe because of the low growth prospects.

“Governments have to ensure effective public health measures toprevent infection and contagion, policiesof support for health systems and their workers as well as protecting the income of vulnerable social groups and businesses, “adds the international institution.

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