COVID-19 Economic Dashboard
- In this dashboard we provide an up-to-date overview of the implications of the COVID-19 spread for economies around the globe
- Although the number of new confirmed cases has been declining in China, the outbreak is far from over as the epicentre has shifted to Europe and more recently the US
- While most countries initially hoped that the impact would be limited to less trade with China, most countries are now experiencing negative effects on their domestic economies after imposing strict containment measures
- Timely economic indicators allow us to grasp the early adverse effects on, for example, the tourism, hospitality and transportation sector
- But with the drastic measures currently in place, no economic sector is likely to emerge unscathed
- Sentiment indicators point to a severe contraction of gross domestic product around the world
- Equity markets reacted immediately to the uncertainty stemming from COVID-19 as was evidenced by stock market indexes plunging and volatility increasing. Depreciation of EM currencies and rising peripheral spreads could prove destabilizing
Given that economic data (such as GDP) becomes available at quite some lag, we construct a COVID-19 dashboard which provides us some early insights into the economic impact of the virus outbreak. We do this by making use of economic indicators available at a high frequency, survey evidence and financial market data. As things evolve, this dashboard helps in tracking the economic impact. For a more elaborate economic analysis, we have conducted a scenario study.
While COVID-19 initially started as a local outbreak in East-Asia, it has now developed into a pandemic. Although the number of cases has more or less stabilized in China, COVID-19 has far from run its course as is evidenced by Europe and the US now being its next epicentre (Figure 1). Throughout the West, a substantial amount of new cases are being reported every day and public life has ground to a halt. Whether the lockdown measures are enough to get the outbreak under control remains to be seen as containment efforts need time to bear fruit.
Please note that the numbers presented in Figure 4 are highly dependent on the number of people tested per country, the strictness of the measures imposed, population density and several other factors. For example, Germany conducts around 300.000 tests per week, more than some European countries have carried out in total during the first few weeks of the crisis.
Several countries in the West have implemented drastic measures to curb the further spread of the COVID-19. Since these drastic measures virtually paralyze economic activity, governments and central banks have announced fiscal and monetary policies to dampen the effect of the containment measures.
Additionally, there have been numerous fiscal measures to support ailing business, the self-employed and employees who have been (partly) laid off because of the virus. Especially the United States have announced a large package of fiscal stimulus, both in absolute terms as in relative (to GDP) terms.
Central banks have taken a slew of measures to alleviate liquidity and funding issues in markets, to prevent interest rates from rising sharply and to support government bond issuance.
Most central banks have cut interest rates, have announced liquidity support measures and re-established or introduced large scale asset purchase programs. On top of that we have seen regulatory forbearance in a number of jurisdictions.
In this section, we present a range of (timely) economic indicators that help us form a first impression of the potential magnitude of the economic effects caused by the COVID-19 outbreak. We have categorized the charts per region: China, Europe, the Netherlands and the United States.
Analysis of timely economic indicators also allows us to spot the first signs of a future rebound in economic activity. For example, starting April 8th, the Wuhan region, the place where it all started, is officially no longer under lockdown. When the time comes, we hope to gauge the pace of economic recovery that is taking place in China by taking a good look at the timely indicators.
We proceed by presenting the first hard data releases. Moreover, we plot historical relationships between timelier survey data and hard data that is released at a substantial lag, such as the national accounts.
Since the virus originated in China, they should be at least one to two months ahead of the curve in terms of economic impact. Therefore, the use of some already available hard data – whilst acknowledging large structural differences between economies - may help us gauge the impact that the virus may have on Western economies, both domestically and via trade related channels.
The economic activity in China does not only act as a proxy of how things could evolve in the domestic part of other economies. We also expect to see effects from the Chinese slowdown via a number of trade-related channels. Below we have created a heatmap for the dependence of European economies on China. Needless to say, Germany is very exposed to China through trade.
Sentiment indicators on sector level in the Eurozone confirm that agents across all sectors are currently far less optimistic. Given the severity of the measures currently in place in most Western economies, it is hard to see any economic sector escaping the negative economic impact of the virus outbreak. The latest release of the Purchasing Managers Index (PMI) suggest output will contract sharply during the first quarter of 2020.
European finance ministers managed to overcome their indifferences and present a EUR 500bn package announced on Thursday April 9th. This package should provide (cheap) liquidity to member states that have been hit hard by the crisis. Nations can apply for funds through SURE (Support to mitigate Unemployment Risks in an Emergency), the European Investment Bank or through the European Stability Mechanism. Contrary to previously approved credit lines from the ESM, new credit lines only bear the conditionality that funds have to be spend on projects directly or indirectly related to the healthcrisis.
Structural factors, such as a relatively heavy reliance on temporary contracts and self-employment, may aggravate the negative economic impact for certain countries from the Covid-19 shock. In particular, countries with relatively little fiscal policy space, such as Spain and Italy, may be vulnerable when the lockdown drags on.
There have also been a number of drastic measures in the Netherlands. Especially small entrepreneurs, the self-employed and businesses in the travel and hospitality sector have been affected by these measures.
Due to global interconnectedness, it was always an illusion for the United States to think it could escape the virus. We are already observing a vast impact on the labor market, since American employees receive relatively little protection and laying off people can be done with the stroke of a pen. The substantial drop in mortgage applications is another indication that uncertainty is high and that as a result the American economy is slowing.
Financial markets may serve as useful indicators to gauge where the crisis will hit hard as investors try to anticipate the economic fallout. Due to liquidity concerns and general uncertainty about the magnitude of the crisis, equity markets plunged and are currently very volatile, with the volatility index reaching similar levels as during the Great Financial Crisis.
Financial markets are not all-knowing however. They do not know how long this crisis will last or which companies will handle the crisis best. The impact that the coronacrisis has on financial markets is thus very dependent on sentiment. Consequently, we should not interpret market prices as a perfect indicator of the potential impact, but they should give some guidance towards which sectors and regions are hit hardest.
We are seeing two risks in financial markets that could aggravate the current economic slump. First, emerging market companies and governments that are dependent on dollar funding could get into a lot of stress. Emerging market FX have plummeted since the start of the year (figure 41), resulting in exploding foreign debts (denominated in the local currency). Investors are increasingly wary to invest in emerging markets or will demand that loans are denominated in US dollars. A further flight to safe haven currencies will only strengthen this effect.
Second, looking at the Eurozone, a further rise in peripheral spreads (figure 42) could endanger the debt sustainability of some countries. If peripheral spreads in the Eurozone become too large, the ECB could interfere, as they did on March 19 by announcing an expansion of the Asset Purchase Program by EUR 750bn. These interventions are controversial however and could lead to political unrest.