Fear can be contagious. The world needs a co-ordinated economic response to the fast-spreading strain of the coronavirus, not only to address the disruption to finance, commerce and industry directly but also to reassure the public and restore confidence.
The OECD, the Paris-based club of mostly rich countries, has warned that the virus and associated shutdowns could cut its global growth forecasts in half. Factory closures in China alone would shave 0.5 percentage points off growth, the OECD said. A more widespread outbreak would cut the expansion of the world economy from 2.9 per cent to 1.5 per cent this year. Even the more benign scenario is enough to push the global economy into a recession, defined as growth below 2.5 per cent.
Given China’s role as the world’s workshop, providing components and raw materials to factories, the shutdown has disrupted the supply chains that underpin modern manufacturing. US port managers have warned that trade volumes could fall by a fifth in the first three months of this year while the cost of leasing big containers ships is far below normal seasonal levels. The oil price has fallen below $50 a barrel.
The damage, however, is by no means limited to manufacturing. Tourism and transport have already been hit: companies have cut back on business travel, conferences have been cancelled and airlines have warned that profits will fall as customers either obey government measures to halt the virus or take matters into their own hands and stay away. IAG, owner of British Airways and Iberia, warned investors last week that the disruption would hurt profits.
Other service activity could suffer if the virus is not contained. Concerns about virus risks could lead customers to stay away from restaurants, cinemas and other public spaces; shoppers taking matters into their own hands has the same effect as an enforced shutdown. Bankers and investors are working out contingency plans to shift operations outside of big cities. Uncertainty can be self-sustaining as drops in spending feed on themselves and businesses cancel spending plans.
On Tuesday, when G7 finance ministers and central bankers discuss their response, they need to be prepared to do everything they can.
Policymakers at the US Federal Reserve, the Bank of Japan and the European Central Bank have already said they are ready to respond to the crisis and provide support. While the disruption is the kind of “supply shock” that is difficult to fight with monetary policy, easing can restore some of the missing demand. The Bank of Korea eased lending terms for small businesses last week.
The virus has come at a particularly difficult time. The global economy was already struggling — unlike during the swine flu epidemic. The trade war and the battles of the car industry already hurt manufacturers. The rise of populism has made co-ordinating responses difficult: the world lacks the sort of leadership that Gordon Brown, then prime minister of Britain, showed in 2009 when he assembled the G20 to address the financial crisis.
Until the public can see a way out of this situation, the fear factor will exacerbate the economic impact. Efforts to halt or slow the spread of the virus have so far taken place on the national level. There must also be a visible international response. Over the past decade, as nationalism has taken root, the world has fragmented. The coronavirus is forcing nations to demonstrate that they are still capable of co-operating for the common good.
