Although the epicenter of the novel coronavirus outbreak is now Europe, only a few major economies have launched effective battles against the pandemic. Hence, the rising levels of imported cases in China.
Since many countries, until recently, were either complacent and/or inadequately prepared to prevent the spread of the coronavirus, the global pandemic has cast a dark shadow over the global economy. It, too, shall pass, but not without effective global cooperation.
Extended economic impact outside China
With the virus still spreading, the number of accumulated confirmed cases worldwide could soon exceed 200,000. In China, the turnaround came a month after the first novel coronavirus pneumonia cases were diagnosed, thanks to its strong containment measures. But outside China, although the first cases were reported after mid-January, they still continue to multiply and now exceed those in China.
In China, the impact of the coronavirus outbreak could ease in April. But outside China, epidemiologists anticipate a peak around June. If that""s the case, economic damage in China would be largely limited to the first quarter, but internationally it would continue well into the second quarter.
Assuming the rise in new imported cases in China and elsewhere can be kept down, even this relatively benign scenario would mean adverse repercussions on the world economy.
After mid-January, I projected three probable virus impact scenarios, which can now be reassessed. In a "SARS-like impact" scenario, a sharp quarterly effect, accounting for much of the damage, would be followed by a rebound. The broader impact would be relatively low and regional. Which is no longer on the cards, however.
In an "extended impact" scenario, the adverse impact would last two quarters. The broader impact would be more severe and affect on global prospects. That""s where the world economy seems headed to.
In an "accelerated impact" scenario, adverse damage would be steeper, even broader, with serious consequences on the global economy. If the containment measures continue to fail outside China, this scenario would ensue.
In early March, the International Monetary Fund projected global growth to fall 0.1 percentage points from the expected 3.3 percent. The estimate was too optimistic. Global growth could drop to 2.4 percent in 2020, or lower, if infection rates continue to rise.
Before the coronavirus outbreak, quarterly growth in the eurozone was 0.1 percent－the weakest in seven years. Now things will get worse. Germany""s GDP will continue to stall, and France and Italy will remain in contraction. In the United Kingdom, annual growth is likely to fall from 1 percent by another 0.2 percent more. In Spain, soaring coronavirus pneumonia cases will reverse the growth pickup. And with debt at 135 percent of GDP, Italy will be particularly vulnerable in 2020.
If the virus cases continue to increase in the eurozone, regional growth could halve to 0.5 percent or less.
In North America, local transmissions are rising rapidly, yet local testing is badly lagging. Despite greater awareness of the coronavirus and weeks of time to prepare, politization replaced mobilization coupled with a series of missteps, including faulty and belated local testing, failures in evacuations and quarantines, lax enforcement of rules and poor monitoring of self-quarantines.
Fed rate cut fraught with risks
Recently, the IMF projected US growth to slow down from 2.0 percent to 1.6 percent. After the White House""s delays of epidemic management, the Federal Reserve cut interest rates close to zero, coupled with a new round of $700 billion for quantitative easing. In the short-term, the move is understandable. But in the long term, it compounds new risks. As the US national debt now exceeds $23.5 trillion (107.3 percent of GDP), its debt burden is at par with Italy""s just before the 2010 European Union sovereign debt crisis.
The Fed""s rate cut is likely to be coupled with fiscal stimulus, which may still not suffice. Yet central banks in Europe, the UK and Japan will follow footprints into more monetary and fiscal accommodation. But that may still fail to quell virus fears, if infection rates continue to soar.
Prior to the coronavirus outbreak, Japan""s economic growth contracted 0.7 percent in the fourth quarter of 2019. After last fall""s consumption tax and the consequent economic turmoil, contraction prevailed in January, while great uncertainty overshadows the 2020 Tokyo Olympic Games. And Japan""s sovereign debt is already 2.4 times larger than its economy.
In addition to Japan and the Republic of Korea, the rest of Asia""s advanced economies are in or almost in recession, including Australia and the regional financial hubs of Singapore and Hong Kong. Since these economies are significant investors in Southeast Asia, their challenges will reverberate across emerging Asia.
Early damage limited in emerging economies
In Southeast Asia, the expected 5 percent growth is now history. Even countries that have strong structural growth potential, including Indonesia, Vietnam and the Philippines, are not immune to indirect short-term hits as their trade, investment, migration and remittance flows depend on the international environment.
The same goes for South Asia, particularly India, Pakistan and Bangladesh. In India, the growth rate has been declining－from 7.7 percent two years ago to 4.7 percent in January. The impact of the pandemic will compound such threats.
Before the crisis, the Chinese economy was still benefiting from a mild recovery. But recently, the IMF projected China""s growth to be below 5.6 percent, and US analysts forecast baseline growth of less than 5 percent, with significant downside risks. However, if China is able to limit the impact of the outbreak mainly to the first quarter of this year, the rebound story is still possible.
The real risk in China and other large emerging economies is the potential negative feedback effect from the world economy in the second quarter. While virus cases have so far been low in Russia, it will be penalized by oil prices, just as Brazil""s growth has been harmed by the fall in commodity prices.
In the Middle East, too, virus cases are climbing, from the Gulf to Egypt and Northern Africa""s Maghreb economies. In Iran, the US"" withdrawal from the nuclear deal and incessant efforts to destabilize the country have been accompanied by a severe outbreak of the novel coronavirus, which will cause further economic erosion.
Sub-Saharan Africa is already struggling with a lingering Ebola crisis in the west and locust plagues in the east. Official virus cases are still low (South Africa, Nigeria, Senegal), but tests have only begun. In simulations, the highest importation risk involves countries that have moderate to high capacity to respond to outbreaks (South Africa), whereas countries at moderate risk have variable capacity and high vulnerability (Nigeria, Ethiopia, Sudan, Angola, Tanzania, Ghana and Kenya).
Seizing opportunities and avoiding risks
If the current downturn scenarios were to materialize, the net effect could mean a $2 trillion shortfall in global income. That would penalize developing economies (excluding China) by some $220 billion or more.
In such scenarios, oil exporters would be the hardest hit. Over the past two months, crude oil prices have halved to less than $30 a barrel, $10 below the 2008 crisis plunge, while commodity exporters could lose over 1 percentage point of growth, along with those that have trade relations with the most affected economies.
In developing economies with weaker health systems, endemic poverty and social instability could result in a secondary epidemic with potential global impact. In this crisis, the world economy is only as strong as its most fragile links.
What is really needed is multipolar cooperation among major economies and across political differences. In this quest, China, whose containment measures have been successful, can show the way, along with major advanced and large emerging powers.
The author is the founder of Difference Group and has served at the India, China and America Institute (USA), Shanghai Institutes for International Studies (China) and the EU Centre (Singapore). The views don""t necessarily reflect those of China Daily.