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6 Mar, 2020 09:58

CORONAVIRUS: Best and worst-case scenarios for global economy

CORONAVIRUS: Best and worst-case scenarios for global economy

The outbreak of Covid-19 has been sending chills through the world economy, wiping some $9 trillion off financial markets. RT talked to some experts about the impact of the virus and scenarios that may unfold.

According to Sourabh Gupta, senior fellow at the Institute for China-America Studies, the worst-case economic cost of the coronavirus could be significant and is being underestimated currently. “I would put it as a halving of global real GDP growth in 2020 from projected 2019 levels of 3.5 percent. Real GDP growth will not fall into negative territory, as it did during the 2008-09 Global Financial Crisis,” he said, noting that it will be the worst global growth performance since the 2001 downturn.

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He was echoed by Peter C Earle, an economist at the American Institute for Economic Research. Earle said the worst-case scenario would see severe disruptions to the global supply chain, airport closings, credit market problems owing to mass quarantines and their effect on employees at globally-important banks and securities firms, as well as financial markets shutting down indefinitely. “At this point, I don’t think that these scenarios are likely at all,” he added.

As for an optimal outcome for the global economy, Earle sees not just a full recovery from the negative economic impact of the coronavirus, but a realization that “unfettered trade is critical to the well-being of all people, and thus additionally the end of the tariff war between the US and China.”

Gupta sees the optimal outcome as the one that is being touted by the International Monetary Fund – just a 0.5 percent dip from forecasted 2020 global GDP growth levels of 3.3 percent. “I frankly feel this is way-too-optimistic and does not fully account for the mass psychology of uncertainty that is depressing consumer sentiment, which has just recently begun to be felt globally as the contagion-risk stemming from rising infection rates spread far beyond China,” he said.

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Chief Economist at BCG, Philipp Carlsson-Szlezak told RT that the optimal outcome would be for Covid-19 to give new impetus to global coordination and investment in disease resilience. “The virus creates a geopolitical reality where cooperation is viewed as essential for tackling modern problems,” he said.

Earle and Gupta agree that the sudden, severe drop in equity markets – especially within the United States – suggests there was more to the price drop than just the coronavirus.

Stock prices are overinflated, says Gupta, pointing out that “they have been overinflated for long periods of time since the Global Financial Crisis, as central bankers have (irresponsibly) provided one additional layer of cushion more than was necessary in order to juice domestic economies via the asset market route.”

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This February/March correction that is underway will not reach market-clearing levels either, he said. “There will be an expectation of loose central bank money and, gamed as central banks have become in this dynamic, they will oblige - especially at a time when mild panic has set in.”

Carlsson-Szlezak, however, says that markets “were not in a bubble and valuations are poor signals for short term equity movements.”

Structurally we should expect valuations to be quite elevated, considering in particular the structurally low inflation and low rates environment, the chief economist says. “Outside of the virus, there was little reason to motivate a sell-off, particularly such a steep one.”

For more stories on economy & finance visit RT's business section