Mortality rates and economic impact are not correlated
Infectious outbreaks impact the economy through various channels, with traditional assessments focusing on the economic damages stemming from illness and fatalities These evaluations estimate future income losses due to death and disability, while also accounting for time lost, decreased income, and direct medical expenses.
This traditional health economics approach underestimates the true costs of the current crisis
Historical data from previous infectious diseases, such as SARS, HIV/AIDS, and pandemic influenza, where vaccines were unavailable, offers valuable insights into understanding the potential implications of COVID-19.
Data from SARS, as well as the Spanish Flu from 1918, provides us with some idea of the economic shocks posed by the current outbreak
The COVID-19 crisis presents a unique shock, distinct from previous economic downturns, as evidence indicates no direct correlation between economic impact and mortality rates The collective response from governments, businesses, consumers, and media has generated simultaneous supply and demand shocks As of this report, it is evident that health risks do not necessarily align with the economic risks faced by the global economy.
Some of the worst-case scenarios for the current pandemic are based on the global influenza of
The 1918 influenza pandemic, which resulted in the deaths of 40 million people worldwide, is second only to the Black Death in terms of mortality, which claimed around 60 million lives This outbreak infected one-third of the global population, and if a similar pandemic were to occur today, it could potentially lead to over 80 million deaths due to a larger population and faster global travel Beyond the tragic loss of life, the pandemic instigated widespread panic and had a significant negative impact on the global economy and trade, with estimates suggesting that a recurrence of the 1918 flu could cost more than $4 trillion.
A 2005 study by the U.S Congressional Budget Office analyzed two pandemic influenza scenarios for the United States: a mild scenario with a 20% attack rate and 0.1% mortality rate, and a severe scenario with a 30% attack rate and 2.5% mortality rate The study projected a GDP contraction of 1.5% for the mild scenario and 5% for the severe scenario Additionally, the World Bank estimated that a global influenza pandemic similar to the 1918 outbreak could cost the economy approximately $3 trillion, equating to around 5% of global GDP, while a mild scenario would result in a cost of 2.2% of GDP.
The unpredictable nature of influenza pandemics has prompted comparisons with recent outbreaks, notably the Ebola outbreak in Africa from 2013 to 2016, which resulted in approximately 11,300 fatalities.
In terms of economic impact, there are estimates of: o US$ 53 billion loss from the economic and social impact of Ebola in West Africa o 20% drop in Sierra Leone’s GDP in 2015
The recent outbreak has highlighted that the economic repercussions can be severe and enduring, even when the health effects are minimal For instance, Liberia experienced an 8 percentage point decline in GDP from 2013 to 2014, despite a reduction in the overall death rate during that time.
This time is different
Unlike previous global crises such as the 2008 financial crisis, the current situation presents unique challenges that complicate direct comparisons This crisis is characterized by a global pandemic affecting all income levels, not just low to middle-income countries Additionally, interest rates are at historical lows, and the world is more interconnected than ever, leading to significant spillover effects across supply chains Moreover, we are witnessing a simultaneous destruction of both demand and supply, further distinguishing this crisis from past events.
2.1- Relevant business and economic news and data
The economic impact of the ongoing health crisis is profound, with significant disruptions across multiple sectors globally Major car manufacturers like Volkswagen and Ferrari have halted production in Europe, while industries such as transport, entertainment, and retail, which contribute to a quarter of Italy's GDP, are severely affected by lockdowns Major events, including Euro 2020 and the Tokyo Olympic Games, have been postponed to 2021, and popular tourist destinations like Paris and Rome are eerily deserted The U.S has witnessed unprecedented job losses exceeding 10 million, with airlines grounding fleets and asking employees for unpaid leave Additionally, sporting leagues like the NBA and Formula 1 have suspended activities, and trade fairs have been canceled Companies are facing financial strain, prompting Germany to offer "unlimited" loans to prevent collapses, while luxury brands like Gucci and Hermes have closed manufacturing sites The situation has led to significant declines in advertising revenue for media groups, and trading on the NYSE has been interrupted multiple times As borders within the EU are reinstated and travel restrictions tighten, the global economy continues to grapple with the fallout from this crisis.
2.2- Comparisons with SARS are not valid
The outbreak of severe acute respiratory syndrome (SARS) in 2002/3 originated in Guangdong, China, and quickly spread to other Asian countries, resulting in over 8,000 infections and more than 900 deaths by the summer of 2003, according to the World Health Organization (WHO) This epidemic caused a significant economic impact, reducing China's growth by 0.5 to 1 percentage point in 2003, and the total cost to the global economy was estimated at $54 billion by the World Bank.
COVID-19 remains shrouded in uncertainty, with evidence indicating it is more contagious than SARS and comparable to the Avian flu However, its mortality rate is significantly lower, ranging from 2-4%, in contrast to SARS's 10% and the Avian flu's alarming 60%.
While both SARS and COVID-19 are coronavirus infections, their economic impacts differ significantly due to China's evolving role in the global economy In 2003, China accounted for only 3% of the world economy, but that figure has now risen to over 16%, meaning any disruption in Chinese activity reverberates across global markets As the world's largest importer and exporter, China's supply chain dominance affects industries reliant on its parts, with companies like Apple and Nike already reporting impacts Additionally, China is a key purchaser of global goods and services, and since 2014, it has been the leading source of international tourism, making many countries' service exports heavily dependent on Chinese consumers The world economy has become increasingly integrated over the past 15 years, leading to larger spillover effects from economic disruptions in any one location In 2019, China contributed approximately 40% of global growth, highlighting that a mere 1% slowdown in Chinese growth now has far-reaching implications for the overall global economy.
Figure 1: China’s role in world’s exports
Figure 2: China’s role in world’s imports
Figure 3: China’s contribution to global GDP
The graphs illustrate that comparisons with 2003 are outdated, as China's influence in the global economy has expanded significantly This growth has led to notable spillover effects, particularly through trade and supply chains, as detailed in sections 2.1 and 3.2, highlighting the disruptions in global trade.
2.3- The second quarter will be worse than the first
Recent evidence indicates a decline in China's GDP during the first quarter, raising concerns as China accounts for approximately 16% of the global economy This downturn is particularly troubling given that, before the crisis, China's GDP growth was projected to be 6% for the first quarter of 2020.
As we enter a global pandemic scenario, countries worldwide are implementing restrictions on public life, mirroring China's response Measures such as lockdowns, mobility limitations, and the establishment of large quarantine facilities are becoming common Increased public health protocols are being enforced to protect the elderly, while travel restrictions are in place, leading companies to send employees home and grounding airplanes.
Most Western countries are currently 1.5 to 2.5 months behind China regarding the outbreak and the implementation of corrective measures, raising concerns about the potential effectiveness of their confinement efforts compared to China's success.
The second quarter is expected to be significantly worse than the first quarter for most countries globally, as recent data indicates In the U.S., over 10 million jobs were lost in the final two weeks of March, surpassing losses during the 2008-2010 financial crisis Additionally, 6.7 million American workers filed for unemployment benefits in the last week of March, a stark increase compared to the previous maximum of less than 700,000.
What we can learn from recent data
3.1- Industry variation: Service hit hardest
Many countries are currently under indefinite lockdowns, leading to a significant shift in daily life as people work from home or are unable to work Travel bans and cancellations of sporting events have become commonplace, along with restrictions on gatherings In Europe, there is a noticeable decline in public transport usage, with individuals opting to stay away from public spaces like restaurants, shopping centers, and museums.
The impact of COVID-19 will be felt across all sectors, with significant evidence indicating a collapse in consumer discretionary spending However, the repercussions of the pandemic will not be uniformly experienced throughout the economy, as data suggests varying degrees of impact among different industries.
The hospitality sector is experiencing severe challenges, with the global travel industry—encompassing airlines, cruise lines, casinos, and hotels—seeing activity plummet by over 90% Tourist destinations are left empty, airlines are halting flights and laying off employees, trade fairs and cruises are being canceled, and hotels and casinos are shutting down operations entirely.
Tourism-dependent businesses are facing significant challenges due to travel restrictions, quarantines, and border closures implemented by governments The cancellation of travel and meetings by companies further exacerbates the situation Notably, Chinese tourists, recognized as the world's largest spenders, play a crucial role in the global tourism economy This impact is illustrated by the distribution of travel and tourism's total contribution to GDP across various countries.
Figure 4: Tourism’s importance in different countries
Source: World Travel & Tourism Council
The significant decline in travel has profoundly impacted numerous global destinations, particularly those heavily dependent on tourism, such as Greece, Portugal, Mexico, and Spain, where tourism accounts for over 15% of their GDP.
Despite the effects of globalization, many services remain locally sourced and are not traded, leading to significant economic repercussions The cancellation of appointments, postponed haircuts, and missed dining experiences severely impact service-oriented economies, with much of the lost output unlikely to be recovered While consumers may delay purchasing items like mobile phones or microwaves, they typically won't compensate for lost dining experiences or haircuts once the crisis ends This underscores the lasting damage to local service sectors during economic disruptions.
3.2- Supply chains and global trade are disrupted
The COVID-19 pandemic has significantly disrupted global supply chain networks, adversely affecting the global economy Evidence from various markets indicates that the crisis has hindered the smooth operation of these supply chains, leading to widespread spillover effects across different tiers of supplier networks.
In 2020, global trade is anticipated to decline across all regions and sectors due to the impact of the coronavirus pandemic This downturn will significantly affect both strong exporting nations, which will see reduced output for local companies, and importing countries facing shortages of raw materials The World Trade Organization (WTO) projects a potential decrease in global trade by as much as 32% this year.
Car manufacturers are halting operations due to a shortage of parts, a challenge that is affecting various industrial sectors Even luxury goods producers, such as those making Swiss watches, are experiencing supply chain disruptions for essential components.
The disruption of supply chains is driving up costs for manufacturing companies, particularly for those like Hasbro, which relies on China for nearly 70% of its products With factories in China shutting down and transportation routes facing significant challenges, Hasbro is struggling to bring its products to market efficiently.
The U.S Institute for Supply Management reveals that 75% of companies are experiencing supply chain disruptions, with lead times for many U.S businesses having doubled This situation is further complicated by shortages of both raw materials and finished products, alongside a lack of available air and ocean freight options for global transportation.
The impact of supply chain disruptions has prompted companies to reevaluate their just-in-time inventory strategies Many managers now recognize the crucial balance between efficiency and resilience As a result, some organizations are opting to diversify their facilities and suppliers across different countries, accepting the trade-off of slightly increased costs to minimize risks.
Chinese officials have announced that the peak of the pandemic has been surpassed, yet many experts anticipate that it will take several months for China's economy to stabilize Additionally, the global spread of the virus is raising concerns about a potential worldwide recession, which is contributing to a decline in demand for Chinese products.
Recent data from the National Bureau of Statistics revealed that analysts significantly underestimated the crisis's impact, with industrial output plummeting over 13.5% in the first two months of 2020, contrary to the median forecast of a 1.5% gain predicted by Reuters.
Similarly, investment in fixed assets fell 25% year-on-year Here, analysts were forecasting 2.8% growth (compared with 5.4% growth in the prior period)
Chinese consumers respected the lockdowns and their authorities' recommendations They were fearful of the virus, and thus moved away from shopping malls, restaurants and movie theatres
As a result, retail sales collapsed by 20%, compared with a forecast of 0.8% by analysts (and very far from the +8% growth in December)
In early 2020, data revealed that 5 million individuals in China lost their jobs during January and February, with projections suggesting this number could exceed 9 million, according to the Economist Intelligence Unit.
Stock market evidence
In March 2020, global stock markets experienced unprecedented declines, with major indices recording their largest one-day drops in history Notably, the Dow Jones Index suffered its worst single-day plunge, falling by 2,977 points on March 16, 2020 Additionally, numerous prominent companies witnessed their share prices plummet by over 80% within just a few days.
Figure 5: S&P 500 performance over the last 4 years
The U.S stock market has experienced a significant decline, with the index now 30% below its peak following a robust bull market Current valuation levels mirror those of the pre-Trump era, reflecting conditions last observed in early 2016 This trend is not unique to the U.S., indicating a broader market shift.
4.1- Markets around the world are significantly down
Figure 6 shows the year-to-date decreases in stock markets for selected countries The U.K and German stock markets have seen even worse performances than the U.S (U.K -37%, Germany - 33%)
Figure 6: Global stock markets' performances in 2020
Figure 7 shows the top 10 worst-performing stock markets Brazil is down by 48%, Poland by 38% Figure 7: Top 10 negative performances - Global stock markets' performances in 2020
4.2- No sector is left untouched
Figure 8: World stock markets - Different sectors returns in 2020
Since the COVID-19 outbreak, industries such as oil, gas, and coal have experienced significant stock declines, averaging 50% below their start-of-the-year prices due to plummeting oil prices and reduced global consumption Additionally, sectors like travel and leisure, aerospace, mining, banks, and media have also suffered, with losses exceeding 30%.
No sector has been left unharmed by this collapse in stock prices Even traditionally stable sectors (like utilities, tobacco and pharmaceuticals) are all down by 20% or more
4.3- Volatility is at historical highs
Implied volatility in equity markets serves as a key indicator of risk and future uncertainty, with the VIX index, known as the "fear index," reflecting this sentiment Derived from the prices of S&P 500 options, the VIX captures market expectations for stock volatility over the upcoming 30 days.
Figure 9: Implied volatility given by the VIX index
Source: http://www.cboe.com/micro/vix/historical.aspx
The VIX, which indicates implied market volatility, has a long-term average of around 20% Following the 2008/9 financial crisis, this volatility spiked, highlighting increased investor uncertainty about future market conditions Currently, implied volatility levels are even higher than those experienced during that tumultuous period.
Historical crises have typically been instigated by various events, including sovereign debt crises, the LTCM default, the dot-com bubble, banking crises, program trading collapses, political upheavals, and wars In numerous instances, central banks possessed the necessary tools to mitigate the impact of these crises and prevent further economic damage.
The current situation is unprecedented, as interest rates are at historically low levels, and in some cases, even negative This raises concerns in the markets regarding the limited capacity for an effective policy response.
Key assumptions in the forecasts
The COVID-19 crisis presents a unique challenge for economic forecasting due to its unprecedented nature as a global health event affecting both supply and demand simultaneously With central banks lacking the capacity to respond effectively, given existing zero or negative interest rates, there are no historical benchmarks to guide predictions Therefore, it is essential to utilize available data to develop key assumptions for an accurate forecasting model.
In analyzing a country's annual GDP, we distribute it across months while considering the impact of economic shutdowns The base scenario anticipates a significant economic shutdown from mid-March to mid-May, mirroring the strict measures implemented in China As of this report, multiple countries have also declared complete lockdowns through the end of April Following this period, May is expected to serve as a gradual recovery phase for most sectors, while tourism-related industries may experience a longer recovery extending into June Ultimately, post-recovery, economic activity is projected to realign with pre-crisis forecasts, such as car sales in August 2020 returning to early 2020 levels.
As of now, the duration of the ongoing crisis remains uncertain, which may result in a conservative outlook There is no assurance that economic activity will return to normal after the removal of containment measures The substantial disruptions to labor and product markets during the crisis could lead to post-crisis performance falling short of pre-crisis expectations Our model does not account for this more pessimistic scenario.
Our estimations utilize data from previous sections regarding the Chinese and global economies, global trade, and high-frequency data reflecting sector-specific impacts We calibrate our results by examining the reduction in consumption expenditure during the SARS outbreak in China and further adjust our model using early 2020 data on China's consumption, production, investment, and retail sales during lockdown months This approach may lead to an underestimation of impacts, particularly as Chinese consumers are significant users of e-commerce Consequently, in countries with less developed e-commerce, the effects on consumption may be more pronounced.
The economic model analyzes GDP by sector for each country, highlighting that service-oriented industries are likely to face greater challenges during crises compared to agriculture and manufacturing With decreased tourism and overall consumption, sectors such as airlines, retail, hospitality, and entertainment are expected to experience significant downturns, a trend reflected in stock market data Consequently, the economic repercussions of a recession are unevenly distributed, varying according to each country's industrial composition Countries with a higher percentage of GDP from tourism are predicted to be more severely impacted than those focused on industrial activities Additionally, nations heavily reliant on exports are anticipated to suffer disproportionately due to documented disruptions in trade flows.
The model fails to account for both direct and indirect health costs, potentially leading to an underestimation of the overall economic impact Labor supply shocks will inevitably arise in each country, influenced by infection-related mortality rates and delays in the return to work for those affected Additionally, absenteeism may increase due to family members contracting the virus Furthermore, the model overlooks potential spillover effects on the financial sector, which could significantly affect firms that rely heavily on financial resources in the event of major disruptions.
Main results
6.1- The COVID-19 economic impact: mild scenario
Table 1 illustrates the economic impact of the COVID-19 crisis, presenting estimates as a percentage of GDP for various countries, along with a confidence interval This analysis reflects the overall economic costs associated with the crisis, based on multiple assumptions discussed in previous sections Notably, the scenario assumes a shutdown duration of 1.5 months, with May designated as a month for gradual recovery.
In a scenario where the economic situation normalizes by the end of May, the crisis is projected to impact economies between 3.5% and 6% of GDP, with the U.S facing a nearly 4% loss On average, countries analyzed are expected to experience a -4.5% impact on GDP, with a median of -4.4% The model considers varying GDP compositions across nations, indicating that countries with a significant tourism sector will suffer greater losses Additionally, disruptions in supply chains and a sharp decline in global trade will further strain economies that heavily rely on foreign trade.
Table 1: Economic impact (% of GDP) – 1.5 months scenario
6.2- Estimated GDP growth for different countries
In this section, we compute the expected GDP growth for each country under the base scenario Table 2Table 2: shows the results
Table 2: Estimated GDP growth in 2020 (and confidence margin) - 1.5 months scenario
Growth in GDP confidence margin
In 2020, the average expected GDP growth across analyzed countries is projected at -2.5%, with a median of -2.8% This forecast incorporates pre-crisis GDP growth estimates from the IMF at the end of 2019, adjusted for the economic repercussions of the COVID-19 crisis For example, France, which was initially expected to grow by 1.3% in 2020, now faces an estimated growth rate of -3% after accounting for a negative impact of -4.3% due to the crisis.
The U.S is projected to face a recession, with a GDP contraction of -1.7%, marking the end of the longest economic expansion in the nation's history due to the impacts of the coronavirus pandemic.
The current crisis is affecting countries worldwide in varying degrees, with China projected to maintain a positive GDP growth of less than 2%, down from a pre-crisis rate of 6% In contrast, most European nations are bracing for significant recessions, with GDP contractions ranging from -3% to -4% Historically, such declines have led to increased unemployment and rising public deficits Consequently, these European countries are expected to experience an average growth rate of -2.5% in 2020, a stark decrease from the nearly +3% growth rate observed in 2019.
The estimates in this section assume a swift return to normal economic activity following the removal of containment measures However, it is likely that the economic repercussions may persist longer than the duration of these measures Governments and public-sector bodies are expected to exercise caution in lifting restrictions, potentially opting for a gradual approach that targets specific sectors Additionally, the disruption experienced in labor and product markets during the crisis could lead to a post-crisis economic performance that falls short of pre-crisis expectations Our model does not account for this more pessimistic scenario.
As of this report, the duration of the ongoing crisis remains uncertain, with several countries implementing complete lockdowns expected to last until late April or early May Consequently, the findings in sections 6.1 and 6.2 may be conservative, as there is no assurance that economic activity will return to normal by May.
The following table provides estimates of the impact if the crisis continues until mid-June With a gradual recovery of economic activity until early-July
Table 3: Estimated GDP growth in 2020, assuming shutdown lasts 3 months
Growth in GDP confidence margin
The second scenario predicts a contraction in GDP across all countries, with an average expected decline of -6.2% in 2020 The impact of the crisis varies globally; for instance, if stringent COVID-19 measures persist until the end of June 2020, the U.S GDP is projected to decrease by 5%, while countries like Germany, Greece, Italy, Portugal, and Spain may experience declines of -7% or more Additionally, each month of crisis is estimated to cost 2.5-3% of global GDP.
Table 4 looks at a more extreme scenario where the shutdown lasts until the end of July With a gradual recovery of economic activity occurring in August
In a worst-case scenario, the global economy could face unprecedented challenges, with an average GDP decline of approximately 10.4% (median = -10.7%) Nations heavily reliant on tourism would suffer significantly, particularly with the summer season nearly lost, while those dependent on foreign trade would also experience severe impacts, potentially seeing GDP reductions exceeding 12%.
Table 4: Estimated GDP growth in 2020, assuming shutdown lasts 4.5 months
Growth in GDP confidence margin
Concluding comments: What lies ahead
The COVID-19 crisis has rapidly escalated into a unique global challenge, where the health risks, including mortality and infection rates, do not directly correlate with the economic risks faced by the global economy Unlike past crises, global trade, which typically allows countries to share risks, is unlikely to provide much relief this time due to the extensive integration of the world economy With interest rates at historic lows, the current crisis is also causing significant spillover effects across supply chains.
A global recession appears unavoidable, with its depth and duration hinging on the effectiveness of COVID-19 containment measures, government policies aimed at supporting small and medium enterprises (SMEs) and financially distressed families, and the preparedness of companies for economic recovery Crucially, the length of ongoing lockdowns will significantly influence the overall economic landscape.
As of this report, the duration of the lockdown and the recovery process remain uncertain, leading to the consideration of multiple scenarios In the base scenario, GDP growth is projected to decline by 3-6% across different countries, resulting in a median GDP decrease of -2.8% for a sample of 30 nations in 2020 In more severe scenarios, GDP could fall by over 10%, with some countries experiencing declines exceeding 15%.
Figure 10: Estimated GDP growth in 2020 under the different scenarios (Median)
Research indicates that each additional month of a crisis can lead to a 2.5-3% decline in global GDP The economic repercussions of a recession are not evenly spread, with certain sectors facing greater impacts Historical data suggests that younger and less educated workers are disproportionately at risk of job loss during such downturns.
The ultimate financial impact of COVID-19 remains uncertain, influenced by the pandemic's duration, severity, and varying governmental responses As anticipation grows for a coronavirus vaccine, the situation remains critical If the crisis extends into late summer, the global economy could face its most significant threat in two hundred years.
Main references, news articles, and other sources
In a significant address, French President Emmanuel Macron declared that the nation is "at war" against the coronavirus pandemic, as the government unveiled a robust $50 billion package of measures aimed at combating the crisis This announcement highlights France's commitment to tackle the economic and health challenges posed by COVID-19 For more details, visit CNBC’s coverage of the event.
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The first wave of layoffs in the United States due to the coronavirus pandemic has been reported, highlighting the immediate economic impact of the crisis Service members are receiving support from organizations like Freedom Dogs, which provides trained service dogs to those dealing with PTSD and other injuries Meanwhile, the USS Gravely is on a mission in the Gulf of America to enhance border security against illegal activities As tensions rise, U.S soldiers are preparing for potential threats in vulnerable NATO member states like Estonia Domestic political shifts are occurring in Israel following the Hamas attack in 2023, while Lebanon's president has ordered military action in response to border skirmishes President Trump has warned Iran of consequences linked to Houthi rebel actions On a different note, retail sales showed a slight increase in February, and St Patrick’s Day celebrations are taking place across the nation Lastly, Firefly Aerospace's Blue Ghost lander has concluded its mission after two weeks of experiments for NASA.
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The 2014 Ebola outbreak in West Africa imposed significant economic and social burdens on the affected regions Huber, Finelli, and Stevens (2018) highlight the extensive impact of the outbreak, detailing the strain on healthcare systems and the broader implications for communities The Journal of Infectious Diseases article emphasizes the need for effective response strategies to mitigate future outbreaks and underscores the importance of understanding the socio-economic consequences of such health crises.
Italian car sales are projected to decline by more than 15% due to the spread of the coronavirus, according to a report from The New York Times The ongoing pandemic has significantly impacted the automotive industry in Italy, prompting concerns about future sales figures As the situation evolves, the effects on car sales are expected to intensify, highlighting the challenges faced by the sector during this global health crisis For more information, visit the original article on Reuters.
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As the hospitality industry faces significant challenges, hotels are implementing layoffs and reducing room rates to cope with declining business The Wall Street Journal article by Morris and Karmin highlights the severe impact on the sector, emphasizing the urgent measures taken by hotels to remain afloat during this crisis.