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How is the coronavirus changing the global economy?

The economic impact of this coronavirus it’s extremely unknown because we don’t know the size, we don’t know the impact, we don’t know how this will spread out across countries. But initially, it’s not farfetched to think that the economic impact will be huge. Mostly not because of the mortality rate that the virus has shown until now, but because of the economic measures that have been taken to undermine the spread of this virus.

OECD has calculated a decline in the GDP of the world to 2.5 or 2.6% this year, which is a substantial decline in the world GDP. But you can think that this can go into even a bigger impact on the world economy. China was supposed to grow this year 6%. If you think that this virus will have an impact only in the Chinese economy, assume that nowhere else, and will imply the decline of 2 or 3% on the first-quarter GDP, so I’m also assuming that will be a V effect. If that happens and then China keeps growing at a normal rate they say 6% per year.

That will imply that the Chinese GDP will go down almost 4 to 5. Actually if 5 you do a minus 2% in the first quarter and 6% on a yearly basis in the next three quarters, the GDP of China will grow this year just 1%. That 1% growth implies that the world will grow 1.3% this year that is the same very low rate of growth of the world economy and that assuming that the impact is only in China.

Add to this a potential impact on commodity exporter countries, on Korea on Italy and the rest and we can arrive very easily to a global recession due to the COVID-19. So two things come out of this. The first one is that we have to be very careful about the policies that are undertaken. The Fed, for instance, has been pumping cash greater than cash to the system.

If I have a supply shock if I have a problem with a value chain, you can dump all the money in the world that won’t have any effect. But the real problem is not being fixed. Secondly whatever, is the behavior of the virus is, that will have a long-term effect.

One thing that coronavirus has done is to make it clear that to have a dependency on China in the value chain is extremely risky. So whatever occurs, we are going to see in the future unfolding of this worth change. And which may indicate a decline in the rate of progress of the worldwide as a result of we are going to lose effectivity. The trade war plus the coronavirus might be the element that will trigger a process of deglobalization in the world.

This has not been the trend since the 1970s. Because of the 1970s that we’ve seen a development towards globalization and tore a greater use of the sources across the globe. If we are going to a deglobalization, balkanization, however, you want to call it, the long-term rate of growth of the world will tend to decrease, and this something that we have to be careful of.

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