The Economic Impact of and Response to the Coronavirus on the Global Economy

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Four months since the first recorded cases of COVID-19, the pandemic has caused unprecedented damage to human health and the global economy. While the current containment measures have further burdened the negative economic impacts caused by the coronavirus, it is a crucial response when weighing up lives and health on the one hand and economic growth on the other.

The novel coronavirus (COVID-19) continues to make the headlines while expanding globally to a pandemic scale during the last two months. While China is slowly showing signs of recovering from its crisis, a second and seemingly much more severe wave has been taking over Europe, America, and Africa, as well as South-East Asia, causing socially and economically unabated damage. Six of the ten largest global economies also top the list of countries most severely hit by the virus (i.e. the United States, Italy, China, Germany, France, and the UK, by the number of confirmed cases). The number of people infected has increased more than nine times, while the death toll rose 18 times during February and March. The situation is evolving unpredictably, making scenario forecasts obsolete in a matter of days.

A timeline of the COVID-19

Source: World Health Organisation

he overall global economy is being attacked on multiple fronts through the lockdown imposed in many of the world’s leading economies. For manufacturing, direct and indirect disruptions have hindered supply chains as the disease forces factories in many of the world’s production hubs to close down and put others, in less-affected areas, into a supply-side dilemma due to a shortage of necessary inputs. From a demand perspective, while demand stays high in essential goods (i.e. food, medical equipment, and health supplies), aggregate demand has dropped as consumers are secluded at home in an effort to contain the disease’s further outspread and flatten the epidemiological curve. The services sector has been severely hit since the early days of the outbreak, starting with tourism, travel, and hospitality, and the situation is continuing to worsen in the face of extended and increasing quarantines, restrictions and unemployment. Companies are delaying or postponing new hires, and in even worse cases, implementing massive layoffs due to losses in revenue and increasing debts. In the US alone, the unemployment claims during the last week of March hit a record level of 3.28 million, while the International Labour Organisation (ILO) estimated 212.7 million people globally could find themselves out of work in the worst-case scenario.

Economists are warning of a global recession caused by COVID-19. The ILO estimated a rise in global unemployment of between 5.3 million (“low” scenario) and 24.7 million (“high” scenario) from a base level of 188 million in 2019. Rising unemployment, in turn, will affect consumption, creating a vicious circle of low production-low consumption. According to a model developed by McKinsey and Oxford Economics, global economic growth might sharply fall by 1.5 to 4.7 percent depending on the effectiveness of policy responses and interventions. Deutsche Bank put out a more dismal forecast, with US GDP to be cut by 13 percent in the second quarter of 2020, and China could see its GDP shrink by 31 percent in the first quarter. Paraphrasing Professor Richard Baldwin, “Go big. Act fast. Keep the lights on,” will limit the damage from the intentional and unavoidable recession. At the same time, longer-term damage can be avoided with rational economic moves. Such policy choices are sober and critical when weighing up lives and health on the one hand and economic growth on the other.

The virus has spread rapidly, but so do the policy responses in most countries. Besides strict restrictions aiming to flatten the progression of the virus (the so-called epidemic-curve), countries are rolling out measures to shield their economies from long-term damage. The US passed through Congress a massive USD 2 trillion coronavirus response package covering, among others, individual aid payment, food assistance, expansion of unemployment insurance, public health, and social emergency fund and business loans. The European Central Bank (ECB) announced a bond-buying scheme worth EUR 750 billion to provide EU members with increased liquidity. At the same time, Germany is financing a EUR 750 billion stimulus package, Spain announced a EUR 200 billion relief package, France unveiled a EUR 45 billion aid package, while Singapore set aside a total of USD 37.5 billion for a support package, among others. According to the IMF’s policy tracker’s daily updates, 193 countries have announced policy measures to mitigate the virus’s financial impact under the form of fiscal monetary and macro-financial policies. Varied in their actual scopes and coverages, these policies share the common goal of preventing excessive economic disruptions to households and businesses, ensuring that companies do not go bankrupt, employment is secured, and the economy will return to a semblance of normality once the coronavirus crisis is over.

Stocktaking of policy options in response to COVID-19

Source: Authors, based on Dell’Ariccia et al (2020). Economic Policies for the COVID-19 War. IMF. April 2020

Observing the development of the virus over the past four months, it seems that we might have missed the golden window to control its spread in the short-term. The scenario under which the virus can be contained within a quarter has proved to be too optimistic. It is still uncertain as to how long the virus will continue to spread, or how long it will take until we find the cure. Although it is proving effective in the short-term, containment is merely an interim fix rather than a long-term solution to this pandemic. “The virus doesn’t care about borders,” stated Bill Gates. In an interconnected world of fragmented global production networks, international capital flows and migration flows, COVID-19 is a global issue, and thus it calls for a global approach, under which all governments, businesses, and international organisations join together to solve the problem.

Authors: Paul Baker, Loan Le


Baldwin Richard (2020). The supply side matters: Guns versus butter, COVID-style., 22 March 2020.

BBC. Coronavirus: Record number of Americans file for unemployment. 26 March 2020.

Dell’Ariccia et al (2020). Economic Policies for the COVID-19 War. IMF. April 2020.

European Central Bank (ECB). ECB announces €750 billion Pandemic Emergency Purchase Programme (PEPP). 18 March 2020.

International Labour Organisation (2020). COVID-19 and the world of work: Impact and policy responses. ILO Monitor 1st Edition, 18 March 2020.

International Monetary Fund (IMF). Policy Responses to Covid-19.

McKinsey & Company (2020). COVID-19: Implications for business. Executive Briefing, April 2020.

Richard Cowan & David Morgan. U.S. Congress, negotiators reach deal on $2-trillion coronavirus aid package. Reuters, 24 March 2020.


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