The economic impact of COVID-19

playlist image — The economic impact of COVID-19

The COVID-19 outbreak was triggered in December 2019 in the city of Wuhan, which
is in the Hubei province of China. The virus continues to spread across the world.
Although the epicentre of the outbreak was initially China, with reported cases either
in China or in travellers from the country, cases now are being reported in many other
countries. While some countries have been able to effectively treat reported cases, it
is uncertain where and when new cases will emerge. Amidst the significant public
health risk COVID-19 poses to the world, the World Health Organization (WHO) has
declared a public health emergency of international concern to coordinate international
responses to the disease. It is, however, currently debated whether COVID-19 could
potentially escalate to a global pandemic.
In a strongly connected and integrated world, the impacts of the disease beyond
mortality (those who die) and morbidity (those who are unable to work for a period of
time) has become apparent since the outbreak. Amidst the slowing down of the Chinese
economy with interruptions to production, the functioning of global supply chains has
been disrupted. Companies across the world, irrespective of size, that are dependent
upon inputs from China have started experiencing contractions in production. Transport
being limited and even restricted among countries has further slowed global economic
activities. Most importantly, some panic among consumers and firms has distorted
usual consumption patterns and created market anomalies. Global financial markets
have also been responsive to the changes and global stock indices have plunged.

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Posted by

Chathuri Hewapathirana

Description

POSTS

In McKibbin and Fernando (2020), we simulate a global economic model to explore seven scenarios regarding the spread of COVID-19. The G-cubed model is a hybrid of dynamic stochastic general equilibrium (DSGE) models and computable general equilibrium (CGE) models which was developed by McKibbin and Wilcoxen (1999, 2013) and extended to the G20 countries by McKibbin and Triggs (2018). Using this model, we follow the approach to evaluating the economics of SARS (Lee and McKibbin 2003) and pandemic influenza (McKibbin and Sidorenko 2006) to explore a range of different scenarios for the spread of COVID-19. Given a range of epidemiological assumptions, we create a set of filters that convert the epidemiological assumptions into economic shocks to reduced labour supply in each country (mortality and morbidity), rising costs of doing business in each sector (including disruption of production networks in each country), a reduction in consumption due to shifts in consumer preferences over each good from each country (in addition to those changes generated by the model based on changes in income and prices), a rise in equity risk premia on companies in each sector in each country (based on exposure to the disease), and increases in country risk premia based on exposure to the disease as well as vulnerabilities to changing macroeconomic conditions.

Description

Artcile :

Scenarios 1 to 3 (called S01, S02 and S03) assume the epidemiological events are limited to China. The economic impact on China and the spillovers to other countries – through trade, capital flows and changes in risk premia in global financial markets – are determined by the model. Scenarios 4 to 6 (S04, S05 and S06) are the pandemic scenarios where the epidemiological shocks occur in all countries to differing degrees. Scenarios 1 to 6 assume the shocks are temporary. Scenario 7 (called S07) is a case where a mild pandemic is expected to recur each year for the indefinite future.

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Assesmnets

A range of policy responses is important both in the short term as well as in the coming years. In the short term, central banks and treasuries need to make sure that disrupted economies continue to function while the virus outbreak continues. In the face of real and financial stress, there is a critical role for governments. While cutting interest rates is a possible response for central banks, the shock is not simply a demand management problem but a multi-faceted crisis that will require monetary, fiscal and health policy responses. Quarantining affected people and reducing large-scale social interaction is an effective response. Wide dissemination of good hygiene practices, as outlined in Levine and McKibbin (2020), can be a low-cost and highly effective response that can reduce the extent of contagion and therefore reduce the social and economic cost.

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