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Three Scenarios for the Global Economy in the Context of COVID-19

If the 2019–20 coronavirus pandemic drags on, the world awaits a new Great Depression. But even if everything is not so bad, the coronavirus will still affect the global economy.
be-in-the-loop - Three Scenarios for the Global Economy in the Context of COVID-19

If the 2019–20 coronavirus pandemic drags on, the world awaits a new Great Depression. But even if everything is not so bad, the coronavirus will still affect the global economy. This post will walk you through three groups of scenarios for the world economy in the context of COVID-19 pandemic, based on forecasts from Bloomberg and McKinsey analysts. 

Soft Scenarios

The epidemic will be quickly defeated, China will suffer (or have already suffered), and recovery will take only a few months. These scenarios are the least likely.

Soft scenarios describe a situation in which China has suffered predominantly from the epidemic. The scenarios are based on the optimistic assumption that the second wave of the virus spread will not take place in the country — after the restrictions on the citizens’ movement and measures of “social distance”, i.e. strict quarantine, are removed.

be-in-the-loop - Three Scenarios for the Global Economy in the Context of COVID-19

These scenarios, however, look less likely every day. There are already at least four self-sustaining epidemic outbreaks in the world outside China. Each of the economies that can be affected is comparable in size and importance to China:

• outbreak in East Asia with the center in South Korea and Japan;

• in the Middle East with the center in Iran;

• in America with the center in the USA;

• and the largest — in Europe with the center in Italy.

Obviously, the epidemic itself and the fight against it outside China are just beginning. It is not yet possible to accurately predict their scope, but it is already clear that the consequences will be significant.

Moderate Scenarios

Many countries will experience what China has gone through. One way or another, everyone will manage by paying a great toll to stop the spread of the virus. The global economy as a whole will restore growth by mid-2020, a global recession is unlikely to take place. These scenarios are most likely.

The moderate scenarios describe the pandemic development in which authorities in various countries, taking the example from China, defeat the coronavirus spread by severe restrictions on the movement and communication of citizens. At the same time, many countries will have to endure hardships comparable to those in China, and in some regions, to what happened in Wuhan, where the epidemic was at its epicenter. So, McKinsey is considering scenarios for the United States, in which there will be one large outbreak in the country with the number of cases from 10 to 500 thousand people, three to four outbreaks three times smaller and a “long tail” from cities with dozens of cases.

be-in-the-loop - Three Scenarios for the Global Economy in the Context of COVID-19

There is a danger that the “moderate” epidemic will imbalance global finances. As Morgan Stanley, one of the largest investment banks, forecasts, as early as April, the central banks of developed countries, trying to support the economy, will lower interest rates to a minimum, surpassing records of soft monetary policy during the crisis of 2008-2009. This will lead to money becoming very cheap. governments that will pursue fiscal stimulus policies will only contribute to making money cheaper. So, Trump has already announced a $ 200 billion business and community support program.

As economists say, infusing money into economy with may not affect demand, but it will cause a surge in inflation; even the half-forgotten term “stagflation” is mentioned — a mixture of stagnation and high inflation, which developed countries have not encountered since the 1980s.

However, while at “moderate scenarios” economists predict moderate losses: according to various researchers, 1-2% of global growth in 2020 will be lost. Recovery will begin in the third quarter. Air transportation and tourism will be in a difficult crisis, from which they will not be able to get out until the end of the year. Oil prices will be low.

Very bad scenarios

Estimates by different researchers of what the word “disaster” means differ greatly. They consider options in which there will be millions of victims in large countries, and the world economy will go into a deep recession. now very bad scenarios are taken seriously.

be-in-the-loop - Three Scenarios for the Global Economy in the Context of COVID-19

Here, economists have great possibilities for predictions and forecasts.

Basically, researchers suggest that the disaster will look like an moderate scenario, but extended in time until the third quarter of 2020, or even for the whole year. At the same time, new independent centers of the epidemic will arise in the world. For this scenario, it is enough that the virus turns out not seasonal, i.e. its spread in the Northern Hemisphere will continue in the summer.

Scenarios based on connection models in the global economy show that a recession is sure to  happen in the world, i.e. the global economy will not grow for at least two consecutive quarters. The peak of economic losses will occur at the end of the year. Now the losses are caused only by a decrease in demand, but soon they will be supplemented by a deep crisis in the stock market, markets for raw materials and investments.

Annual growth will be either minimal — 0.5–1% (McKinsey), or even zero (Bloomberg). The loss of the global economy will amount to about $ 2.7 trillion in 2020 alone (Bloomberg model). This is comparable to the losses from the Great Recession of 2008-2009, when in the first six months of the crisis the world economy lost two trillion.

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