Chinese workers at a factory making hazardous material suits to be used in the coronavirus outbreak.
Photo: noel celis/Agence France-Presse/Getty ImagesThe global economy will slow sharply this year as governments attempt to contain the coronavirus epidemic, although the scale of the setback is highly uncertain, the Organization for Economic Cooperation and Development said Monday.
In its “best case” scenario, the Paris-based research body said the global economy would grow by 2.4%, a weaker performance than the 2.9% expansion projected before the viral outbreak. That lost growth is roughly equivalent to $400 billion. But it said much more severe slowdowns are possible.
The global economy slowed in 2019, and was particularly weak in the final three months of the year. Given that starting point, the OECD said it’s possible the global output will fall during the first three months of this year, putting the economy at risk of recession.
However, the research body is forecasting a rebound in growth during 2021, assuming the outbreak is contained over the coming months. But that recovery wouldn’t be immediate, and some lost output would never be recovered.
“It’s not like it plunges and then it recovers quickly,” said Laurence Boone, the OECD’s chief economist.
To date, the outbreak has been most severe in China, and the government has responded with travel bans and quarantine requirements that have closed factories and left service providers without customers. In its best-case scenario, the OECD forecasts that China’s economy will grow by 4.9% this year, down from its previous projection of 5.7%. However, it expects growth to rebound to 6.4% in 2021, having previously forecast an expansion of 5.5%.
A survey of businesses released Monday by data firm IHS Markit found that manufacturing activity experienced its steepest slump on record during February. The country’s Purchasing Managers Index fell to 40.3 from 50.1 in January, its lowest level since April 2004. A reading below 50.0 points to a drop in activity.
Elsewhere in Asia, South Korea’s factories suffered the sharpest slowdown, as the country’s PMI fell to 44.4 from 50.1. There were also dips in Japan, Thailand, Malaysia, and Taiwan.
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China accounts for a little more than 16% of global economic output, so disruption in the world’s second-largest economy is expected to have an impact on a number of other economies. The OECD said those with the closest links—Japan, South Korea and Australia—will suffer most from a drop in Chinese tourists, a fall in Chinese demand for commodities and other goods, and an interruption in the supply of Chinese-made parts that are needed to complete products made in other countries. The OECD said that makers of computers, electronics, pharmaceuticals and transport equipment around the world are particularly reliant on Chinese parts,
Farther afield, the impact on growth is expected to be much more modest. For the U.S., the OECD sees a very slight slowdown this year, with gross domestic product expanding by 1.9% as against a previous forecast of 2%.
In Italy, the European country with the largest number of victims as the month of February ended, the OECD doesn’t expect to see any growth this year, having previously forecast an increase in GDP of 0.4%. But as with China, it expects to see a recovery in 2021, with growth still projected at 0.5%.
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Those projections assume that the outbreak doesn’t have the same impact on Europe and North America as it is having on China. In a scenario where it does, and similarly extensive restrictions on movement are put in place, the OECD forecasts that global economic growth could slow to 1.5% this year. But that isn’t the worst possible outcome, with global growth likely to be even slower if the virus takes hold in Africa, Latin America and India.
“We are super-humble doing this projection, given how uncertain things are,” said Ms. Boone.
The OECD is the first of the international financial institutions to publish extensive modeling of the potential economic impact of the coronavirus. The body, which provides advice to member governments that include the U.S., also listed a range of policies that they should consider in response to the health emergency.
They include ensuring that health systems and health workers have the funds available to tackle the virus, and providing financial support to businesses and workers that will suffer from the containment measures.
Industries such as tourism, which appear likely to be particularly hard hit, could be supported through cheap, long-term loans from the government, the OECD said. China alone accounts for a 10th of all tourists world-wide, and a quarter or more of all visitors in Japan, Korea and some smaller Asian economies. But as tourists become reluctant to visit any other country in which infections have been reported, the damage to a sector that accounts for 7% of employment in the OECD’s 36 member countries will rise.
Ms. Boone also said that last week’s steep declines in global equity markets were a “cause for concern” and that policy makers around the world should make it clear that they will work together to provide needed support for economies affected by the virus, as they did during the global financial crisis.
“I would encourage a statement, because it’s in the interests of everyone,” she said. “They should make it clear that further accommodation is necessary.”
That support could come in the form of cuts to key interest rates, but Ms. Boone said central banks alone wouldn’t be in a position to offset the economic losses incurred to contain the virus, and that governments should increase spending where needed.
Write to Paul Hannon at paul.hannon@wsj.com
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