RaboResearch - Economic Research

Dit artikel is ook beschikbaar in het Nederlands

Global Economic Outlook: COVID-19 has taken a hold of the global economy

Economic Quarterly Report

This publication is outdated. See our most recent publication
  • COVID-19 is having a major impact on both the Chinese and the global economy
  • We expect global economic growth to amount to 1.6% in 2020 and 3.2% in 2021
  • Apart from China, emerging markets are currently experiencing the most economic pain
  • There is a real risk that the spread of COVID-19 will be more serious than we are currently estimating in our base scenario
  • In a risk scenario of a pandemic, the economic losses in 2020 could roughly double
  • There is an additional risk that the economic crisis in the risk scenario could lead to liquidity problems at businesses around the world, which would threaten financial stability. This is an additional risk and is not taken into account in our pandemic risk scenario
  • A robust response from the central banks and governments should prevent the virus crisis becoming a financial crisis as well

COVID-19 is pulling down global growth

Table 1: Economic outlook of selected countries
Table 1: Economic outlook of selected countriesSource: Macrobond, IMF, RaboResearch

We expect global economic growth to be 1.6% in 2020 and 3.2% in 2021 (see table 1). We have sharply adjusted our growth forecast for 2020 to the downside as a result of the outbreak of the recent coronavirus, officially named COVID-19 (see figure 1). We have also calculated a risk scenario in which the virus spreads further (see box 1). Under this scenario, economic growth in China and the global economy will fall to 0.2% and 0.7%, respectively (see also figure 1).

China will be hit the hardest

Figure 1: The economic impact of COVID-19 in 2020
Figure 1: The economic impact of COVID-19 in 2020Source: RaboResearch, IMF, Macrobond

The most negative effects of COVID-19 are being felt in China, the epicentre of the virus. Currently more than 80,000 people in China have been infected, out of just over 120,000 people worldwide (see the current COVID-19 monitor of Johns Hopkins University). We expect economic growth in China in 2020 to amount to 2.4%, much lower than the 5.7% we were forecasting at the end of 2019. We expect there to be substantial economic damage in countries with close economic relationships with China (such as Australia, South Korea, Japan, Thailand and Germany) and countries in which the virus is spreading rapidly (such as South Korea and Italy) (see figure 1). Due to the countrywide lockdown in Italy, we have revised our growth outlook for the Eurozone to -0.1% this year and 1.2% in 2021 and to -1.6% for Italy in 2020. This is lower than we have communicated earlier (see here).

Box 1: Can one calculate the economic effects of COVID-19?

Estimating the economic effects of a virus outbreak is a daunting task due to the many uncertainties involved. We have attempted as good as possible to assess the economic impact for various countries using a number of assumptions and two economic models.[1] We use different sets of assumptions for two scenarios. In the first scenario, which is our baseline scenario, there will be heavy losses in China and certain other countries (South Korea and Italy) in which the virus has already spread substantially, but the downturn in economic activity will remain limited in countries where the virus is not as yet widespread. The second scenario is a risk scenario in which the global spread of the infection sharply increases. In this scenario, countries in which the outbreak is currently limited still get confronted with a COVID-19 epidemic. We have made various assumptions for both our base case and the risk scenario, which we have briefly listed below.

Baseline scenario

  • Hours worked: To simulate the lockdown in Hubei/Wuhan and Italy, we have reduced the number of hours worked per employed person temporarily. This is done by calculating the proportion of the Chinese and Italians working-population in the lockdown area in the first half of 2020. People in areas subject to quarantine will have a limited possibility to work. We also assume people will work overtime in China and Italy in the second half of 2020 to deal with the backlog of orders.
  • Private consumption: The virus outbreak will negatively affect consumer behaviour. Purchases will be postponed or even cancelled (eating out, vacations). To include this effect, we have temporarily sharply reduced private consumption in countries facing the COVID-19 epidemic (China and Italy) in line with the average decline in private consumption in Hong Kong and Taiwan during the SARS outbreak in 2002/2003 and in Brazil during the outbreak of the Zika virus in 2015/2016.
  • Investment premium: The volatility in financial markets and negative investor sentiment are reflected by increasing the investment premium for China and gradually reducing this in the course of 2020. We also slightly increased the investment premium in other countries to account for the worldwide negative sentiment.
  • Trade: Trade has become cumbersome and more expensive. These higher costs will have the same effect as temporary non-tariff trade barriers, such as phytosanitary restrictions. Countries with sizable exports to China are expected to experience a temporary decline in their export market shares due to the trade problems.
  • Exchange rates: we have made assumptions for exchange rates in various countries against the US dollar: the Chinese yuan; the euro; the Japanese yen; the British pound; the Canadian, Australian and New Zealand dollars; the Danish and Norwegian krone and the Swedish krona; and the Swiss franc.
  • Government policy: Policymakers in China will attempt to ease the economic pain with supportive measures. We have included positive effects from government spending and investment, albeit limited, since fiscal stimulus has only a limited positive effect on consumption in times of serious uncertainty. In other countries as well, we are expecting moderate mitigating government policy.

Risk scenario: a pandemic

Under the risk scenario, we assume that the effects on various economies will be longer-lasting and more serious. The effects of the assumptions used in the base case will also be more serious and last for longer in the pandemic scenario. We have also included a number of additional assumptions:

  • Hours worked will decline in all countries: Since a pandemic scenario expects lockdowns to increase worldwide, we have temporarily reduced the number of hours worked per worker in all countries. This is done by using the decline in hours worked in Taiwan and Hong Kong during the SARS epidemic as reference point.
  • Productivity: Businesses experiencing finance difficulties over the production shocks may be forced to reduce their R&D budgets, which will harm innovation and productivity growth. Finally, value chains may become less integrated to some extent. These chains are currently dispersed across the world to enable cost-efficient production. Now that COVID-19 has exposed the vulnerability to a disruption of these global value chains, businesses may decide to reduce this vulnerability and accept higher production costs.

Why the global impact is so substantial

Production in China has slumped as a result of the virus outbreak. The national vacation for the Chinese New Year has been extended and large areas have been quarantined (especially in the province of Hubei). Production in a substantial portion of the economy has grinded to a halt. The monthly production surveys for the industrial and service sectors (composite production PMIs) collapsed in February. The PMIs are at levels that indicate that the vast majority of businesses are experiencing stagnating or falling production.[2] The industrial and service sectors are both hit hard because workers and customers are staying at home. Exports have also fallen sharply, with recent figures showing that the value of Chinese exports fell by 17% in January and February this year compared to the same period in 2019.

The Chinese economy has showed only a slow pick-up in activity in February. According to estimates from Bloomberg, based on various utilization measures, the economy was running at 65% and 75% of its normal level in the last week of February and the first week of March respectively. The economy could make up for some of the production losses in the coming months; hence growth over the entire year is still possible. However, the longer it takes for production to pick up, the more difficult this will become.

The global economic impact of COVID-19 is almost certainly going to be greater than that of the SARS epidemic in 2002/2003, which also started in China (see this study for a comparison). First of all, the share of the Chinese economy in the total global economy is currently 20%, much higher than it was in 2003 (9%, see figure 3).

Figure 2: COVID-19 is hitting Chinese industrial production
Figure 2: COVID-19 is hitting Chinese industrial productionSource: Macrobond, RaboResearch, China Federation of Logistics, NBS
Figure 3: China’s share in the global economy has increased
Figure 3: China’s share in the global economy has increasedSource: Macrobond, Conference Board, RaboResearch

Secondly, the Chinese economy is now much more closely interlinked with the rest of the world than it was 10 to 20 years ago. For many countries, China is now (i) an important export market, (ii) a source of tourism and (iii) a supplier of intermediate goods. Over the years, the value chains of international businesses have become increasingly fragmented and spread across the world, and China has become the world’s factory. For example, a major proportion of all consumer electronics (mobile phones and laptops) is now made in China, as are the batteries for many electric cars and the raw materials for certain medicine.

Because production in China has slowed substantially as a result of the virus outbreak, many goods are no longer available in other countries and businesses are being forced to rely on their inventories. The longer the lack of supply of these products lasts, the greater the likelihood that shelves will be empty or scarcity will lead to higher prices that consumers will feel in their wallets. There will also be delays to production at businesses using intermediate goods made in China. In many cases it will not be easy to find an alternative of equivalent quality at very short notice. And if a key component is missing, the entire value chain could be affected. In summary: the global value chain, in which China plays a crucial role, is being seriously disrupted by COVID-19 and large adverse economic effects are expected around across the globe.

The disruption of international trade caused by the coronavirus in combination with the disrupting effects of US-China trade tensions may prompt international businesses to diversify their production across several countries. In a previous publication we already argued that countries such as Thailand, Malaysia and Vietnam will be beneficiaries of this development. But these effects only occur over time, and the negative effect of slower growth in China on these economies will have will dominate for now.

The impact on emerging markets

Emerging markets, especially in Southeast Asia, have so far felt the worst effects of the virus outbreak. Many Southeast Asian countries depend heavily on China and are also physically at greater risk of a more widespread outbreak. This is already the case in South Korea, where the number of people infected has almost reached 7,800 at the time of writing. The higher risk of the virus spreading in Southeast Asia is due among other things to higher population density in combination with health care services that are less abundant than in many Western countries. For example, the average number of hospital beds and doctors per 1,000 people in Southeast Asia is 0.7 and 1.5 respectively, compared to 5.6 and 3.6 in the EU (according to OECD data).

Figure 4: EM currencies have depreciated heavily against USD
Figure 4: EM currencies have depreciated heavily against USDSource: Macrobond

Moreover, emerging markets that rely on exports of raw materials such as Brazil (iron ore, oil, soy beans), Russia (oil and gas) and Chile (copper) are facing a drop in income from their principal export products, as the prices of many commodities have declined substantially since the virus outbreak. The currencies of emerging countries are also under pressure, as investors are reducing risk in their portfolios due to the negative sentiment worldwide and are accordingly reducing their holdings in emerging markets to some extent. A serious currency depreciation is a problem for emerging markets, because products from abroad become much more expensive (i.e. deterioration of terms of trade). Some countries will also find it more difficult to service their foreign currency debt, which is a problem, for example, for Argentina and Turkey. We expect the currencies of emerging markets and the prices of raw materials to continue to be highly volatile in the coming period as a result of the general negative sentiment due to COVID-19.

Effects in other countries

The rest of the world is feeling negative effects mostly via China, but there are also local effects elsewhere. There are now already sizable outbreaks outside China, with thousands of confirmed cases in South Korea and Italy. Quarantine measures were imposed initially to North Italy and have expanded for the whole country since March 9th. Italy was already on the brink of recession, so a sharp contraction of the economy appears to be inevitable (-1.6% in 2020).

The effects are less in other countries where the outbreak is as yet limited. The main impact here is due to the economic shock from China, but there are also effects within these countries. The widespread uncertainty and fear of the virus is for example also causing people to postpone their vacation and avoid locations where large numbers of people assemble. Businesses are cancelling events and prohibiting travel for their personnel. The sectors most affected by the virus are therefore tourism and related sectors such as transport, air travel and hospitality. Meanwhile, large economies in the EU such as France, Germany and Spain, where a little over 5,000 people infected at the time of writing, are facing the same problems.

Risks to financial stability

The number of bankruptcies in China could increase rapidly if economic activity does not pick up soon, with small and medium-sized enterprises (SMEs) being particularly vulnerable. A recent survey by two Chinese universities found that two-thirds of Chinese SMEs have less than two months’ worth of cash to meet their short-term liabilities. Chinese businesses also have a huge debt load, worth 150% of GDP.

The number of corporate bankruptcies could also increase worldwide due to the general economic slowdown. Especially if the virus becomes more widespread, as in our risk scenario, this could lead to risks for financial stability. This applies especially in countries where corporate debt levels have risen rapidly (such as the US) or that were already vulnerable (such as Italy). If banks and other financial institutions experience a serious deterioration in the quality of their loan portfolios, there is a danger that the COVID-19 crisis could even trigger a financial crisis. This is not a part of the risk scenario (see Box 1), and it can be prevented if central banks and governments take the necessary policy measures. We think that these measures should in any case include targeted financial measures such as new TLTROs by the ECB.


[1] We use two models: a macro-econometric global trade model (NiGEM) and a productivity model specifically developed for the Chinese economy by RaboResearch.

[2]  The Chinese Federation for Logistics and Purchasing Managers reported a composite PMI of 28.9 for February and the Caixin reported 27.5. In these production PMIs, businesses are asked whether their production is rising, falling or stagnant, with allocation of values of 100, 50 or 0 respectively.

Hugo Erken
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2223 1650
Menno Middeldorp
Head of RaboResearch Rabobank KEO
+31 6 8389 9872
Raphie Hayat
RaboResearch Global Economics & Markets Rabobank KEO
Kan Ji
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 8329 1678

naar boven