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  • Writer's pictureAccountant High Wycombe


Economic impact of coronavirus

The coronavirus (Covid-19) appeared in December 2019 in the Chinese city of Wuhan, located in the province of Hubei (central China). The current spread indicates that Europe as a whole is, in this month of April, the main focus of the pandemic. However, taken individually, the United States has the highest number of people infected. In Europe, Spain, Italy, Germany and France are the most affected countries.

On April 21, the official balance sheet of the World Health Organization reported 162,956 people dead and 2,397,216 people infected. The spread of the virus continues to intensify outside China: 2,313,011 people have been infected in 195 countries, mainly in the United States (751,273), Spain (200,210) and Italy (181,228) where 27,668, 4,266 and 2,256 new cases were registered respectively compared to the previous day. 158,314 people died from the virus outside of China (5.109 more than the day before).

While the number of new cases recorded in China has considerably decreased, the assessments made since February 26 highlight that the number of new cases observed in the rest of the world now exceeds that of China. As of April 21, there were 82,993 new cases for the rest of the world and 13 cases for China. In the European Union, as already mentioned, Spain and Italy (faced with an elderly population) are particularly affected with respectively 20,852 and 24,114 people who died from the consequences of the virus on April 21. According to the latest data from the FPS Public Health (April 22, 11:30 a.m.), 41,889 patients tested positive in Belgium. The number of new cases per day whose peak was reached on April 14 (2,454 patients) continues to decrease, however, it stood at 933 on April 21 (including 263 new hospitalizations).

What Do We Currently Know About The Economic Impact In China?

The initial economic impact was mainly felt in China and resulted from a supply shock and a demand shock. Like the SARS epidemic (whose negative impact on GDP was 1.05 percentage points in 2003), the coronavirus will have a negative impact on the expansion of the Chinese economy in the short term. In the first quarter of 2020, private consumption expenditure (transport, leisure and retail) was affected and industrial activity, in particular the production of cars and their components (many international car manufacturers are located in Wuhan) , equipment, electrical equipment, etc. has practically stopped in some Chinese provinces.

Data from the Purchasing Managers Index (PMI) from last March (50.1 against 40.3 in February) shows an increase in the volume of industrial production after a drastic reduction and the major disruptions in the supply chains observed in February. While an increasing number of companies are returning to their activities, the conditions for demand remain fragile. The sharp drop in the volume of purchasing activities suggests the pursuit of limited growth in production in the coming months, essentially responding to the re-establishment of supply chains.

It is difficult to estimate at present the impact of the coronavirus on Chinese GDP in 2020. The recent publication of preliminary national accounts figures (April 20, 2020) by the National Bureau of Statistics of China forecasts a drop in GDP Chinese in the first quarter of 2020 of 9.8% compared to the last quarter of 2019 and 6.8% compared to the first quarter of 2019.

According to the scenario of the Economist Intelligence Unit (March 26, 2020), the annual growth rate of China's GDP in 2020 would be limited to 1% due to the coronavirus instead of the 5.9% previously estimated.

On the other hand, the forecasts of Mc Kinsey & Oxford Economics (April 3, 2020) envisage a slight recession in the Chinese economy. In the best of scenarios (assuming an interruption in the spread of the virus in the middle of the second quarter, a seasonality of the virus and an effective response from health authorities to reduce the number of infected people) , growth Chinese economy would drop to -0.5% in 2020. While in the worst-case scenario (continued spread of the virus around the world with no seasonal effect, health systems submerged in many countries), its GDP would contract 2.3%.

The International Monetary Fund (IMF), in its latest communication (April 14, 2020), estimates Chinese GDP growth for 2020 as a whole at + 1.2% after a contraction in the first quarter (-8%).

How The Virus Affects The Global Economy

Strongly integrated into global value chains, China, the cradle of the epidemic, has become a major global economic player. Indeed, it is now the second world economy with a share of 15.8% in world GDP (calculations of the SPF Economy on the basis of figures from the World Bank Data) and 12.8% in world exports of goods (figures from the United Nations Conference on Trade and Development - UNCTAD). Due to the exponential increase in the number of contaminations in other geographical areas, measures have been adopted to deal with the unprecedented global health, economic and human crisis.

It is however still premature to measure with precision the negative consequences of the pandemic on the world economy. Indeed, there remains a great deal of uncertainty about the duration and extent of the crisis, as well as the impact of the measures taken. The IMF forecasts (April 14, 2020) a fall in world GDP growth (-3%) less marked than that of the United States (-5.9%) and the euro zone (-7.5%) in 2020.

Mc Kinsey & Oxford Economics revised (April 3, 2020) world GDP growth for 2020 according to the best of scenarios at -1.8%, and the worst of scenarios at -5.7% and GDP growth of the euro area at -4.7% and -10.6% respectively. The United States would see economic growth reach -2.4% in the first scenario and -8.7% in the second.

The Economist Intelligence Unit (March 26, 2020) now anticipates a contraction in the GDP of the United States for 2020 (-2.8% compared to a previous estimate of +1.7%) and of our main European trading partners. Italy (-7% against + 0.4%) and Germany (-6.8% against + 0.9%) showing a more pronounced recession than France (-5% after +1%).

The European Commission (13 March 2020) estimates that the Covid-19 crisis will have a very significant negative economic impact on the EU and the euro zone and that its direct impact, all channels taken together, will reduce real GDP growth in 2020 by 2 , 5 percentage points. As a result, EU economic growth could fall below -1% before experiencing a substantial rebound in 2021.

Financial markets, exchange rates and commodity price quotes are currently again subject to large swings due to coronavirus, although this impact may be short-lived. The contraction in Chinese demand also caused the world price of oil (Brent oil) to fall. As the European economy is more closely linked to China than the American economy, the euro is under greater pressure than the dollar.

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