OECD-2020 Outlook

OECDInterimEconomicAssessmentCoronavirus:Theworldeconomyatrisk2March2020SummaryThecoronavirus(COVID-19)outbreakhasalreadybroughtconsiderablehumansufferingandmajoreconomicdisruption.OutputcontractionsinChinaarebeingfeltaroundtheworld,reflectingthekeyandrisingroleChinahasinglobalsupplychains,travelandcommoditymarkets.Subsequentoutbreaksinothereconomiesarehavingsimilareffects,albeitonasmallerscale.Growthprospectsremainhighlyuncertain.OntheassumptionthattheepidemicpeaksinChinainthefirstquarterof2020andoutbreaksinothercountriesprovemildandcontained,globalgrowthcouldbeloweredbyaround½percentagepointthisyearrelativetothatexpectedintheNovember2019EconomicOutlook.Accordingly,annualglobalGDPgrowthisprojectedtodropto2.4%in2020asawhole,fromanalreadyweak2.9%in2019,withgrowthpossiblyevenbeingnegativeinthefirstquarterof2020.ProspectsforChinahavebeenrevisedmarkedly,withgrowthslippingbelow5%thisyear,beforerecoveringtoover6%in2021,asoutputreturnsgraduallytothelevelsprojectedbeforetheoutbreak.Theadverseimpactonconfidence,financialmarkets,thetravelsectoranddisruptiontosupplychainscontributestothedownwardrevisionsinallG20economiesin2020,particularlyonesstronglyinterconnectedtoChina,suchasJapan,KoreaandAustralia.Providedtheeffectsofthevirusoutbreakfadeasassumed,theimpactonconfidenceandincomesofwell-targetedpolicyactionsinthemostexposedeconomiescouldhelpglobalGDPgrowthrecoverto3¼percentin2021.Alongerlastingandmoreintensivecoronavirusoutbreak,spreadingwidelythroughouttheAsia-Pacificregion,EuropeandNorthAmerica,wouldweakenprospectsconsiderably.Inthisevent,globalgrowthcoulddropto1½percentin2020,halftherateprojectedpriortothevirusoutbreak.Governmentsneedtoactswiftlyandforcefullytoovercomethecoronavirusanditseconomicimpact.Governmentsneedtoensureeffectiveandwell-resourcedpublichealthmeasurestopreventinfectionandcontagion,andimplementwell-targetedpoliciestosupporthealthcaresystemsandworkers,andprotecttheincomesofvulnerablesocialgroupsandbusinessesduringthevirusoutbreak.Supportivemacroeconomicpoliciescanhelptorestoreconfidenceandaidtherecoveryofdemandasvirusoutbreaksease,butcannotoffsettheimmediatedisruptionsthatresultfromenforcedshutdownsandtravelrestrictions.Ifdownsiderisksmaterialise,andgrowthappearssettobemuchweakerforanextendedperiod,co-ordinatedmultilateralactionstoensureeffectivehealthpolicies,containmentandmitigationmeasures,supportlow-incomeeconomies,andjointlyraisefiscalspendingwouldbethemosteffectivemeansofrestoringconfidenceandsupportingincomes.CORONAVIRUS:THEWORLDECONOMYATRISK2GlobaleconomicprospectsremainsubduedandveryuncertainduetothecoronavirusoutbreakThecoronavirus(COVID-19)outbreakhasalreadybroughtconsiderablehumansufferingandmajoreconomicdisruption.InChina,containmenteffortshaveinvolvedquarantinesandwidespreadrestrictionsonlabourmobilityandtravel,resultinginunplanneddelaysinrestartingfactoriesaftertheLunarNewYearholidayandsharpcutbacksinmanyservicesectoractivities.Thesemeasuresimplyasizeableoutputcontractionwhilsttheeffectsoftheoutbreakpersist.Subsequentoutbreaksinothercountries,includingKoreaandItaly,havealsopromptedcontainmentmeasuressuchasquarantinesandborderclosures,albeitonasmallerscale.Theadverseconsequencesofthesedevelopmentsforothercountriesaresignificant,includingthedirectdisruptiontoglobalsupplychains,weakerfinaldemandforimportedgoodsandservices,andthewiderregionaldeclinesininternationaltourismandbusinesstravel.Riskaversionhasincreasedinfinancialmarkets,withtheUS10-yearinterestratefallingtoarecordlowandequitypricesdecliningsharply,commoditypriceshavedropped,andbusinessandconsumerconfidencehaveturneddown.2019InterimEOprojectionsDifferencefromNovemberEOInterimEOprojectionsDifferencefromNovemberEOWorld12.92.4-0.53.30.3G201,23.12.7-0.53.50.2Australia1.71.8-0.52.60.3Canada1.61.3-0.31.90.2Euroarea1.20.8-0.31.20.0Germany0.60.3-0.10.90.0France1.30.9-0.31.40.2Italy0.20.0-0.40.50.0Japan0.70.2-0.40.70.0Korea2.02.0-0.32.30.0Mexico-0.10.7-0.51.4-0.2Turkey0.92.7-0.33.30.1UnitedKingdom1.40.8-0.20.8-0.4UnitedStates2.31.9-0.12.10.1Argentina-2.7-2.0-0.30.70.0Brazil1.11.70.01.80.0China6.14.9-0.86.40.9India34.95.1-1.15.6-0.8Indonesia5.04.8-0.25.10.0Russia1.01.2-0.41.3-0.1SaudiArabia0.01.40.01.90.5SouthAfrica0.30.6-0.61.0-0.31.AggregateusingmovingnominalGDPweightsatpurchasingpowerparities.2.TheEuropeanUnionisafullmemberoftheG20,buttheG20aggregateonlyincludescountriesthatarealsomembersintheirownright.3.Fiscalyears,startinginApril.OECDInterimEconomicOutlookForecasts,2March2020RealGDPgrowthYear-on-year%change20202021Note:ProjectionbasedoninformationavailableuptoFebruary28.DifferencefromNovember2019EconomicOutlookinpercentagepoints,basedonroundedfigures.3Relativetosimilarepisodesinthepast,suchastheSARSoutbreakin2003,theglobaleconomyhasbecomesubstantiallymoreinterconnected,andChinaplaysafargreaterroleinglobaloutput,trade,tourismandcommoditymarkets(Figure1).ThismagnifiestheeconomicspilloverstoothercountriesfromanadverseshockinChina.Evenifthepeakoftheoutbreakprovesshort-lived,withagradualrecoveryinoutputanddemandoverthenextfewmonths,itwillstillexertasubstantialdragonglobalgrowthin2020.Figure1.ChinaaccountsforarisingshareofglobalactivityNote:Shareofindustry,GDPandtradeinconstantUSdollars.ShareofglobalFDIincurrentUSdollars.Dataforthetouristsharereferto2002and2017,anddataforFDIreferto2005and2018.Industrydataareonavalue-addedbasisandincludetheconstructionsector.Source:OECDEconomicOutlookdatabase;OECDFDIinFigures,October2019;andWorldBank.SignsofstabilisationhadappearedpriortotheCOVID-19outbreak,althougheconomicactivityremainedweakPriortotheCOVID-19outbreak,activitydataremainedsoftbutsurveyindicatorshadbeguntostabiliseorimproveinbothmanufacturingandservices(Figure2).Financialconditionshadalsostrengthenedfollowingmovestoincreasemonetarypolicyaccommodationandreducetradepolicytensions.PreliminaryestimatessuggestthatglobalGDPgrowthslowedfurtherinthefourthquarterof2019,tojustover2½percent(atanannualisedrateonaPPPbasis)(Figure2),withstrikes,socialunrestandnaturaldisastersaffectingactivityinanumberofcountries.GrowthremainedclosetotrendintheUnitedStates,butdemandfellsharplyinJapanfollowingtheconsumptiontaxincreaseinOctoberandstayedweakineconomiesstronglyexposedtotheslowdowninglobaltrade,includingGermany.Growthcontinuedtobesubduedinmanyemergingmarketeconomies,withGDPgrowthslowlyeasinginChinaandlargenon-performingloansandover-leveragedcorporatebalancesheetsweighingoninvestmentinIndia.Industrialproductioncontinuedtostagnateinlate2019,andthegrowthofconsumerspendinglostmomentumdespitecontinuedsteadyemploymentgains.Thepaceofthedeclineinglobalcarsalesmoderatedthrough2019,butdemandhassubsequentlytumbledagain,withprovisionaldatasuggestingamonthlydeclineof10%insalesinJanuary2020,witha20%declineinChina.Globaltradealsoremainsveryweak.Merchandisetradevolumescontractedinthefourthquarterof2019,anddeclinedin2019asawhole,thefirstcalendaryearfallsince2009(Figure3,PanelA).Containerporttrafficandairfreighttrafficwerealsoweakaheadofthecoronavirusoutbreak,andfurthersharpfallsseemlikelyinthenearterm.SurveymeasuresofmanufacturingnewexportordershadbeguntoturnupbutfellbackintheflashPMIsurveysforFebruary,particularlyinJapanandAustralia.Investmentdataarealsosoft,heldbackinpartbycontinuedhighuncertaintyandweakexpectedfuturegrowth.AggregateinvestmentgrowthintheG20economies(excludingChina)slowedfromanannualrateof5%earlyin2018toonly1%lastyear.4Figure2.GlobalgrowthhaslostmomentumNote:GDPatconstantpricesonaPPPbasis.Dataforthefourthquarterof2019areanestimate.TheadvancedeconomyPMIseriesareaPPP-weightedaverageforAustralia,theeuroarea,Japan,theUnitedKingdomandtheUnitedStates.Source:OECDEconomicOutlookdatabase;andMarkit.ThehighertariffsimposedonUS-Chinabilateraltradeoverthepasttwoyearsareanimportantfactorbehindtheweaknessofglobaldemand,tradeandinvestment.TheUS-China“PhaseOne”tradeagreementinJanuaryisawelcomedevelopmentthatshouldhelptoalleviatesomeoftheseeffects.Nonetheless,thecommitmentbyChinatopurchaseanadditionalcumulativeUSD200billionofgoodsandservicesfromtheUnitedStatesover2020-21(relativetoa2017baselineofaroundUSD180billion)willbechallengingtoachievewithoutdistortingthird-partytrade,andbilateraltariffsremainsubstantiallyhigherthantwoyearsago.Overall,thePhaseOneagreementreducesthedragonglobalGDPgrowthin2020and2021fromthemeasuresimplementedoverthepasttwoyearsbyaround0.1percentagepointperannum(Figure3,PanelB).Figure3.Globaltraderemainsweak,withacontinueddragfromtradetensionsNote.EstimatesinPanelBshowthecombinedimpactofthechangesinbilateraltariffsimplementedbytheUnitedStatesandChinain2019priortoandafterthePhaseOneAgreementandaglobalriseof50basispointsininvestmentriskpremiathatpersistsforthreeyearsbeforeslowlyfadingthereafter.Alltariffshocksaremaintainedforsixyears.BasedonsimulationsonNiGEMinforward-lookingmode.Source:CPB;IATA;RWI/ISLContainerThroughputIndex;andOECDcalculationsusingtheNiGEMglobalmacroeconomicmodel.5Thecoronavirusoutbreakhassignificantlyweakenednear-termglobaleconomicprospectsSincetheoutbreakinJanuary,closeto85,000peoplehavebeeninfectedworldwide,withafast-risingshareoftheseoutsideChina.TheepicentreoftheoutbreakwasinHubeiprovince,whichaccountsforabout4.5%ofChina’soutput,buttheeffectshavebeenquicklyapparentthroughoutChinawitheffortstocontrolthespreadofthevirusleadingtowide-rangingrestrictionsonpassengertransportation,labourmobilityandhoursworked.AvailableindicatorsforFebruarypointtosignificantdeclinesinactivityinsideChina,andthetentativesignsofamildimprovementtowardstheendofthemonthappearunlikelytoberapidenoughtopreventthelevelofoutputinthefirstquarterof2020beinglowerthaninthefourthquarterof2019.ProductiondeclinesinChinahavebeenquicklyfeltbybusinessesaroundtheworld,givenChina’skeyroleinglobalsupplychainsasaproducerofintermediategoods,particularlyincomputers,electronics,pharmaceuticalsandtransportequipment,andastheprimarysourceofdemandformanycommodities.Temporarysupplydisruptionscanbemetbyusinginventories,butinventorylevelsareleanduetojust-in-timemanufacturingprocessesandalternativesupplierscannoteasilybeobtainedforspecialisedparts.Aprolongeddelayinrestoringfullproductioninaffectedregionswouldaddtotheweaknessinmanufacturingsectorsinmanycountries,giventhetimeittakestoshipsuppliesaroundtheworld.Travelrestrictions,andthecancellationofmanyplannedvisits,flights,businessandleisureeventsareseverelyaffectingmanyservicesectors.Thisislikelytopersistforsometime.Worldwide,Chinesetouristsaccountforaroundone-tenthofallcross-bordervisitors,andone-quarterormoreofallvisitorsinJapan,KoreaandsomesmallerAsianeconomies(Figure4,PanelA).ExportsoftravelservicestoChina,includingthespendingbyChinesevisitors,arealsosignificantinmanycountries(Figure4,PanelB).ThevirtualcessationofoutboundtourismfromChinarepresentsasizeablenear-termadversedemandshock.Thisisalreadyapparentinmanydestinations;visitorarrivalsinHongKong,ChinainFebruarywere95%lowerthanusual.Ifthespreadofthecoronavirusoutbreakaffectsvisitornumbersmorewidelyacrossthemajoreconomies,therewouldbesizeablecosts,withtourismaccountingdirectlyfor4¼percentofGDPintheOECDeconomiesandalmost7%ofemployment.Figure4.ChinesevisitorsaccountforarisingshareofvisitsandtouristspendinginmanyeconomiesNote:PanelA:dataforJapanandKoreaareforthefirst11monthsof2019;dataforAustraliaarefortheyeartoJune2012andJune2019;dataforFrance,Malaysia,NewZealand,thePhilippines,andtheUnitedStatesarefor2018;dataforIndonesiaarefor2017.PanelBdataforSingaporeandThailandareforspendingbyforeigntouristsinthecountry.DataforHongKong,ChinaandIcelandarefor2017.Source:OECDEconomicOutlookdatabase;OECDTradeinServicesbyPartnerCountry;Austrade;Eurostat;DirectionGénéraledesEnterprises;JapanNationalTourismOrganisation;KoreaTourismOrganisation;TourismMalaysia;NewZealandStatisticsOffice;PhilippinesDepartmentofTradeandIndustry;SingaporeTourismBoard;StatisticsCanada;MinistryofTourismandSports,Thailand;USInternationalTradeAdministration;VietnamNationalAdministrationofTourism.6Globalgrowthissettoweakenthisyearandrecovergraduallyin2021Growthprospectsareveryuncertain.TheprojectionsarebasedontheassumptionthattheepidemicpeaksinChinainthefirstquarterof2020,withagradualrecoverythroughthesecondquarteraidedbysignificantdomesticpolicyeasing.Togetherwiththerecentmarkeddeteriorationinglobalfinancialconditionsandheighteneduncertainty,thiswilldepressglobalGDPgrowthintheearlypartoftheyear,possiblyevenpushingitbelowzerointhefirstquarterof2020.EveniftheCOVID-19effectsfadegraduallythrough2020,asassumed,illustrativesimulationssuggestthatglobalgrowthcouldbeloweredbyupto½percentagepointthisyear(Box1;Figure5).Newcasesofthevirusinothercountriesarealsoassumedtoprovesporadicandcontained,butifthisisnotthecase,globalgrowthwillbesubstantiallyweaker.Figure5.IllustrativecoronavirusscenarioshighlighttheadverseimpactongrowthChangeinGDPgrowthin2020relativetobaseline,percentagepointsNote:Simulatedimpactofweakerdomesticdemand,lowercommodityandequitypricesandhigheruncertainty.Base-casescenariowiththevirusoutbreakcentredinChina;broadercontagionscenariowiththeoutbreakspreadingsignificantlyinotherpartsoftheAsia-Pacificregion,EuropeandNorthAmerica.SeeBox1forfulldetailsoftheshocksapplied.CommodityexportersincludeArgentina,Brazil,Chile,Russia,SouthAfricaandothernon-OECDoil-producingeconomies.Source:OECDcalculationsusingtheNiGEMmacroeconomicmodel.Onthisbasis,globalGDPgrowthisprojectedtoslowfrom2.9%in2019to2.4%thisyear,beforepickinguptoaround3¼percentin2021astheeffectsofthecoronavirusfadeandoutputgraduallyrecovers(Figure6).Announcedandimplementedpolicyactionsincorporatedintheprojectionswillhelptosupportincomesinthenearterm,particularlythosewell-targetedonaffectedfirmsandhouseholds.Macroeconomicpolicystimulusinthemostexposedeconomieswillhelptorestoreconfidenceastheeffectsofthevirusoutbreakandsupply-sidedisruptionsfade.Lowinterestratesshouldhelpcushiondemand,althoughtheimpactofrecentandprojectedchangesinpolicyinterestratesonactivityislikelytobemodestintheadvancedeconomies.FiscalpolicyeasingwillalsohelpinAsianeconomies,butitappearslikelytobemorerestrictivethandesirableinmanyothers,particularlyinEurope,givensoftgrowthprospectsandlowborrowingrates.Householdspendingcontinuestobeunderpinnedbyimprovinglabourmarketconditions,butslowingjobcreationislikelytoweighonincomegrowth,andpersistentweakproductivitygrowthandinvestmentwillcheckthestrengthofrealwagegains.Uncertaintyislikelytoremainelevated,withtradeandinvestmentremainingveryweak.Thedownturninfinancialmarketrisksentiment,andreductionsinbusinesstravelandtourismarealsolikelytoconstraindemandgrowthforsometime.7Figure6.GDPgrowthprospectsaresettoremainweakNote:ProjectionsfromthecurrentInterimEconomicOutlookandtheNovember2019OECDEconomicOutlook.Source:OECDEconomicOutlookdatabase.Prospectsforthemajoreconomiesaremixed:ProspectsforChinahavebeenreviseddownmarkedlyin2020,withcalendaryearGDPgrowthprojectedtobejustunder5%.Calendaryeargrowthin2021iscorrespondinglypusheduptobetween6¼-6½percent,withthelevelofoutputthrough2021broadlyinlinewithwhatwouldhavebeenprojectedintheabsenceofthecoronavirusoutbreak.Asimilar,albeitlesspronounced,patternisprojectedinmanyeconomiesstronglyinterconnectedwithChina,includingJapan,Korea,AustraliaandIndonesia.TheeffectsofthecoronavirusoutbreakonothereconomieslessheavilyintegratedwithChinaareprojectedtoberelativelymild,particularlyintheUnitedStatesandCanada,althoughthedeclineinconfidence,disruptiontosupplychainsandweakerexternaldemandwillmoderategrowthprospects.Growthintheeuroareaisprojectedtoremainsub-par,ataround1%perannumonaveragein2020-21,althoughtheimpactofthevirusoutbreakwillweakenoutcomesinthefirsthalfof2020.TheprojectionsfortheUnitedKingdomandtheeuroareaarebasedonanassumptionthatabasicfreetradeagreementforgoodscomesintoforcefromthestartof2021.Evenifthisisimplementedsmoothly,thehighercostsforserviceexportsandnon-tariffadministrativebarriersarelikelytoweighonexportsandoutputgrowththrough2021.Agradual,albeitmodest,recoveryinmanyemerging-marketeconomiesisprojectedfor2020-21,buttheextentofthisrecoveryisuncertain.AnupturnwillrequireapositiveimpactfromreformsandmonetarypolicysupportinIndiaandBrazil,well-focusedpolicymeasuresinMexicoandTurkeytoboostsustainablegrowth,andagradualrecoveryincommodityexportersexposedtotheslowdowninChinathisyear.DownsiderisksaresignificantGrowthcouldbeweakerstillifdownsiderisksmaterialise.Inthenear-term,themajordownsideriskisthattheimpactofthecoronavirusproveslongerlastingandmoreintensivethanassumedintheprojections.IntheeventthatoutbreaksspreadmorewidelyintheAsia-Pacificregionorthemajoradvancedeconomiesinthenorthernhemisphere,theadverseeffectsonglobalgrowthandtradewillbemuchworseandmorewidespread.IllustrativesimulationsofthisdownsideriskscenariosuggestthatglobalGDPcouldpossiblybereducedby1½percentin2020,ratherthanby½percentasinthebase-casescenario(Box1;Figure5).AlargerdeclineingrowthprospectsofthismagnitudewouldlowerglobalGDPgrowthtoaround81½percentin2020andcouldpushseveraleconomiesintorecession,includingJapanandtheeuroarea.TheoverallimpactonChinawouldalsointensify,reflectingthedeclineinkeyexportmarketsandsupplyingeconomies.Otherimportantdownsiderisksinclude:Tradeandinvestmenttensionsremainhighandcouldspreadfurther.TheprospectsforafurthertradedealbetweentheUnitedStatesandChinathatwouldremovealltheremainingtariffsputinplaceoverthelasttwoyearsareuncertain.Inaddition,otherbilateraltradetensionscouldalsostillspread,notablybetweentheUnitedStatesandEurope.FailuretoachieveapromptresolutiontothecurrentdisruptiontoWTOdisputesettlementprocedureswouldalsoaddtoglobaltradepolicyuncertainty.Aparticularconcernisthattradeandinvestmentrestraintsmaybeusedasleversinnegotiationsabouttaxationofglobalcorporationsandothernon-trade-relatedissues.UncertaintyremainsaboutthefutureUK-EUtradingrelationshipandwhethernegotiationsonthiscanbecompletedbeforetheendofthetransitionperiodsetoutinthewithdrawalagreement(currentlyend-2020).Thepossibilitythataformaltradedealwillnotbeagreedremainsadownsideriskandasourceofuncertainty.IftradebetweentheUnitedKingdomandtheEuropeanUnionweretoreverttoWTOtermsafter2020,insteadofabasicfreetradeagreementforgoodsasassumedintheprojections,near-termgrowthprospectswouldbesignificantlyweakerandmorevolatile.Sucheffectscouldbestrongerstillifpreparationstoborderarrangementsfailedtopreventsignificantdelays,oriffinancialmarketconditionsandconsumerconfidenceweretodeteriorateconsiderably.TherecentsharpreactioninfinancialmarketstothespreadofthecoronavirusinlateFebruaryaddstothepersistingfinancialvulnerabilitiesfromthetensionsbetweenslowergrowth,highcorporatedebtanddeterioratingcreditquality,includinginChina.Globally,justoverhalfofallnewinvestmentgradecorporatebondsissuedin2019wereratedBBB(thelowestinvestment-graderating)andaquarterofallnon-financialcorporatebondsissuedin2019werenon-investmentgrade.Thesedevelopmentsraisetheriskofsignificantcorporatestressifriskaversionintensifiesfromalreadyhighlevels,especiallyineventofasharpeconomicdownturn.Insuchcircumstances,currentBBB-ratedbondscouldbedowngradedtonon-investmentgrade,withtheassociatedenforcedsalesamplifyingthefinancialmarketeffectsoftheinitialdownturntriggeredbythecoronavirusspread.Box1.IllustrativecoronavirusscenariosandtheireconomicimpactThescenariossetoutbelowillustratethepotentialglobaleconomiceffectsthatcouldresultfromtheCOVID-19outbreakinChinaandtherisksthatitspreadstoothereconomies.Theanalysiscontainstwoscenarios,lookinginitiallyatthepotentialimpactsofacontainedoutbreak,centredlargelyinChina,andsubsequentlythepotentialeffectsfromanillustrativedownsidescenarioinwhichtheoutbreakspreadssignificantlymorethanhassofaroccurredintootherpartsoftheAsia-Pacificregionandadvancedeconomiesinthenorthernhemisphere.Thebase-casescenario:acontainedoutbreakAninitialscenarioconsiderstheeffectsofashort-lived,butseveredownturninChina,andhasbeenusedasaguidefortheupdatedgrowthprojections.Theimpactofthecoronavirusoutbreak,andthemeasuresusedtocontainitsspread,isakintoanadversesupply-sideshock,withanenforceddeclineinthenumberofhoursworked.However,theeffectsaremirroredinweakerdemand.Adeclineinconfidence,foregoneincome