As of April 5, 2020, there are 177 countries/regions confirming cases of new coronavirus infections (COVID-19), making this an unprecedented pandemic1. With the number of infected people increasing and medical systems under severe pressure, measures such as lockdowns and border restrictions have been tightly imposed in most countries/regions. As a result, economic activities in both production and consumption have been temporarily halted. Indeed, the pandemic is creating a situation that is simultaneously freezing the global economy. Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), said that the impact of the Corona Shock on the global economy could be "far worse" than that of the 2008-2009 global financial crisis (also known as the Lehman Shock). 2
How much impact will the unprecedented pandemic have on the global economy? In this paper, the author will quantitatively analyze the impact of the Corona Shock using an applied general equilibrium model (Computable General Equilibrium (CGE)). The estimation results show that the longer the COVID-19 outbreak continues and the greater the spread of infections, the greater the negative impact on the global economy. The impact is forecast to be at or even above the level of the Lehman Shock.
Unlike natural disasters such as earthquakes and typhoons, infectious diseases do not destroy production facilities (capital stock) and are therefore considered to be a relatively short-term shock. However, we should recognize that the impact of the Corona Shock will be deep and far more extensive, seriously affecting companies, workers, and households around the world.
For all countries/regions, the foremost priority is to make efforts to prevent the spread of COVID-19 and to bring it under control as soon as possible. At the same time, countries/regions have to respond with economic policies that are maximally effective and timely so that economic activities can be resumed in their original form after the outbreak is brought under control. In supporting these efforts, it is extremely important for the international community to strengthen cooperation and to help vulnerable countries and regions.
The channels by which the COVID-19 outbreak affects the real economy are: (1) a stagnation of domestic consumption (demand side); (2) a decline in external demand due to a deterioration of overseas economies (demand side); (3) a stagnation of trade in services such as tourism and transportation (demand side); (4) a stagnation of domestic production (supply side); (5) disruptions of supply chains (supply side); and (6) cost increases due to disruptions of logistic systems.
In this paper, the author uses the CGE model to conduct simulation analysis from the two scenarios of demand and supply3. For a detailed explanation of the analytical framework and scenarios, please refer to the full version of this report on JIIA`s website.
Summary of Simulation Results
The main points of the simulation results are summarized below. Higher and lower cases have been prepared for each scenario. The higher case assumes that ending the outbreak takes about one year and results in high overall infection rates for populations, while the lower case assumes that ending the outbreak takes about three months with low overall infection rates for populations.
Scenario 1: Impact of decreases in external demand (demand-side analysis)
- Japan's real GDP contracts by 5.4% (US$250 billion) in the higher case and by 1.9% (US$87 billion) in the lower case. During the 2009 GFC, Japan's GDP declined by 5.4%, so the higher case would have the same impact as the Lehman Shock.
- The real GDPs of the United States and the EU+UK respectively contract by 4.8% (US$825 billion) and 8.3% (US$1,182 billion) in the higher case, and by 1.4% (US$241 billion) and 2.2% (US$318 billion) in the lower case. Economic losses in the United States and the EU+UK will exceed the levels reached during the Lehman Shock. The recessions in the United States and Europe will have an enormous adverse impact on the global economy.
- The real GDP of China contracts by 11.2% (US$1,164 billion) in the higher case and by 2.9% (US$299 billion) in the lower case. During the 2009 GFC, China used 4 trillion yuan in fiscal spending to maintain positive growth. However, it is expected to be difficult for China to implement similar fiscal measures this time because of the aftereffects of bad loans, as well as the structural slowdown in economic growth. China is forecast to experience negative growth for the first time in 44 years,4 and the results of this study show that this would be possible.
- In addition, East Asian countries have a large impact on the manufacturing industry through supply chains, and those countries that are highly dependent on exports will experience particularly significant negative growth. Since the Corona Shock is a real economy-oriented crisis and has a significant impact on supply chains, it will have a serious effect on the East Asian economy where manufacturing bases are concentrated.
- Australia is hit hard by falls in exports of steel and coal, while Russia suffers from dropping crude oil and gas exports. Sluggish demand for resources also leads to lower resource prices.
- Employment is also seriously impacted. In Japan and the United States, the manufacturing and service industries are particularly affected. In China and ASEAN, employment in manufacturing is hardest hit. Considering the working populations in each country/region, the number of unemployed in Japan and the United States can reach as many as several millions, and in China and ASEAN tens of millions. This affects employment across an extremely wide range of industries due to the interdependent nature of economies.
Scenario 2: Impacts of stagnating production and disrupted logistics systems (supply-side analysis)
- Japan's real GDP contracts by 3.9% in the higher case and by 1.7% in the lower case. The overall impact is amplified due to the large negative effect on exports. Primary and manufacturing industries increase output because the supply of overseas products stagnates and the prices of imported goods rise, and industries with comparative advantage switch to domestic production. Since most service industries rely on domestic demand, they will be negatively affected by the stagnation of domestic production (= decline in income).
- The real GDP of the United States contracts by 2.9% in the higher case and by 1.2% in the lower case. There is a negative impact on agricultural exports. A shift to domestic production will result in positive growth in the manufacturing industry. Service industries will be severely affected.
- China's real GDP contracts by 6.1% in the higher case and by 2.5% in the lower case. The overall impact is amplified because manufacturing exports are greatly affected. The manufacturing and service industries experience significant negative growth in production volume.
- The real GDP of the EU+UK contracts by 6.5% in the higher case and by 3.0% in the lower case. The overall impact is amplified due to the large negative effects on exports. The shift to intra-regional supply chains will result in positive growth in manufacturing production within Europe. Service industries will be severely affected.
- The real GDPs of ASEAN, South Korea, Taiwan and Hong Kong contract largely due to the negative effects on manufacturing exports. Since South Asia and Russia are relatively domestic-oriented economies, the stagnation of domestic industries has a considerably negative impact. In South Asia (particularly India), service industries will be severely affected.
- The declines in the trade volumes of Japan, the United States, China and the EU+UK are massive. In terms of value, the four countries/regions together suffer losses of US$1,226 billion in exports and US$2,381 billion in imports in the higher case, and US$573 billion in exports and US$1,171 billion in imports in the lower case.
The estimated impact of the unprecedented COVID-19 pandemic on the global economy could be on par with or even greater than that of the Lehman Shock. Never before has the entire global economy been frozen at the same time, that is, simultaneously squeezed in both production and consumption. Policy makers should grasp the scale of the Corona Shock correctly when designing policy responses, and to make full use of flexible and innovative policies that can respond to unexpected consequences.
The first priority is to prevent the spread of infections in all countries/regions and to bring the virus under control as soon as possible. In the meantime, economic activities will be temporarily suspended over a very extensive range. There is a need for economic measures of sufficient scale to support companies, workers and households. It is argued rightly that this is the time for emergency fiscal responses to secure financial resources, and central banks should play a role.5 Since the impact of the Corona Shock is expected to penetrate widely into economies and societies, economic measures should be designed in such a way that they can reach as many citizens as possible. Specifically, assistance should be extended to support small and medium-sized enterprises, protect workers, and safeguard the livelihoods of households. It is often the socially vulnerable that are most affected by economic shocks. Therefore, the economic measures should include social safety net features. Considering that the socioeconomic impact of the Corona Shock is likely to linger, safety net measures should be considered for the medium to long term as well as the short term.
The international community must strengthen its solidarity to overcome this unparalleled pandemic. It is also essential that assistance be provided to vulnerable countries/regions. The G7 and G20 should continue to promote fiscal and monetary policy coordination. Best practices in economic approaches should be shared, and the importance of social safety nets actively discussed at various international economic forums/organizations.
PWC. "The possible economic consequences of a novel coronavirus (COVID-19) pandemic", PWC, 2020.
McKibbin, Warwick and Rosen, Fernando. "The Global Macroeconomic Impacts of COVID-19: Seven Scenarios", The Brookings Institution, 2020.
Yanagida, Kensuke. "The Impacts of the New Coronavirus Pandemic on the Global Economy", The Japan Institute of International Affairs, Column/Report, April 9, 2020.
The Date of Completion of Writing: April 22, 2020
*This strategic comment is based on the commentary in the Japanese version published on April 9.
1 Ministry of Foreign Affairs (last viewed: April 5, 2020)
2 "Sekai Keiki, Kin'yū kiki yori 'haruka ni warui' IMF Senmu Riji" [IMF Managing Director says the global economy could be "far worse"ar worduring the financial crisis], (Nihon Keizai Shimbun, April 4, 2020)
3 Previous analytical studies of the Corona Shock using CGE include McKibbin & Fernando (2020) and PWC (2020). McKibbin & Fernando (2020) analyzed seven scenarios and estimated Japan's GDP at minus 0.3% to minus 9.9%. PWC (2020) estimated Australia's GDP at minus 1.32%.
4 "Shingata Korona de Kotoshi wa Mainasu Seichs" [New coronavirus to result in negative growth this year] by Tatsuichi SEKI of the Japan Research Institute (SankeiBiz, April 6, 2020)
5 Wolf, Martin, "We must focus attention on our next steps," Financial Times, April 7, 2020