How will COVID-19 impact the global economy?
Understanding the Economic Shock of the Covid-19 Crisis
Predicting the path ahead has become nearly impossible, but we can speculate about the size and scale of the economic shock.
Economic contagion is now spreading as fast as COVID-19 itself. Social distancing, intended to physically disrupt the spread, has severed the flow of goods and people, stalled economies, and is in the process of delivering a global recession. Predicting the path ahead has become nearly impossible, as multiple dimensions of the crisis are unprecedented and unknowable. Pressing questions include the path of the shock and recovery, whether economies will be able to return to their pre-shock output levels and growth rates, and whether there will be any structural legacy from the coronavirus crisis. This Explainer explores several scenarios to model the size and scale of the economic shock and the path ahead.
There are several sources of effects over the global economy.
First, markets are more integrated and interlinked, with a Chinese economy that contributes 16 percent to the global gross domestic product. Thus, any shock that affects China now has far greater consequences for the world economy.
Second, the supply shocks due to morbidity and mortality, but also the containment efforts that restrict mobility and higher costs of doing business due to restricted supply chains and a tightening of credit will affect economies leading to a reduction of economic growth or an economic recession.
In March, the OECD cut its forecast for global economic growth in 2020 from 2.9 percent to 2.4 percent, which would be the lowest level since the financial crisis a decade ago, warning that a prolonged and more intensive coronavirus epidemic could even halve this figure to a mere 1.5 percent.
Third, the demand will also fall due to higher uncertainty, increased precautionary behaviour, containment efforts, and rising financial costs that reduce the ability to spend.
Finally, there is a significant devaluation of the exchange rate with respect to the US dollar, which will also affect the import dependent countries.
Global food markets are not immune to these developments. However, they are likely to be less affected than other sectors that are more exposed to logistical disruptions and weakened demand, such as travel, manufacturing and energy markets (Source: Market Monitor, AMIS, March 2020). But given the complexity of the food value chains and the importance of trade and transportation, these could make them extremely vulnerable.
While COVID-19 likely represents a deflationary shock for the global economy, reflected in early moves by the FAO Food Price Index, in the short term the real cost of a healthy diet may rise because of the increase in the cost of perishable commodities, which would have a particularly adverse impact on lower-income households and raise the price of progress towards the Sustainable Development Goals.
This effect, as shown in 2019 The State of Food Security and Nutrition in the World, will be most importantly in countries with high commodity-import dependence. Here, the negative effect is stronger, as a one percent increase in commodity-import dependence causes an average increase in undernourishment of 3.8 percent per year. When the country is food-import dependent, there is an average increase in undernourishment of 8% per year. Furthermore, the demand shock will contribute to prolonging and worsening the effect.
COVID-19: how it will change the world
Even when COVID-19 is under control, the long-term effects of the virus will be far-reaching. How will the coronavirus pandemic—and the way it has been handled—change the world?