Coronavirus could tip Europe into recession, OECD warns

Eurozone and Japanese economies may contract this year while global growth is cut in half, says report

The coronavirus outbreak could tip much of Europe into recession and cut global growth in half this year, economists have warned.

The Organisation for Economic Co-operation and Development (OECD) said the euro area, which includes some of Europe’s biggest economies, could enter a contraction within months.

Global growth may be as low as 1.5 per cent this year, down from the 2.9 per cent previously forecast, the OECD said on Monday.

The think tank, which represents 36 wealthy countries, said Japan could also be tipped into recession.

It warned that the Covid-19 virus presented the gravest threat to global economic growth since the financial crisis and could cause a “domino scenario” where the virus’s intense impact on China is mirrored across other advanced nations, severely hitting confidence, travel and spending.

China’s economy will suffer a severe, short-lived downturn, with growth dropping from 6.1 per cent in 2019 to less than 5 per cent this year before recovering in 2021, according to the OECD.

“The virus risks giving a further blow to a global economy that was already weakened by trade and political tensions,” said OECD chief economist Laurence Boone.

“Governments need to act immediately to contain the epidemic, support the health care system, protect people, shore up demand and provide a financial lifeline to households and businesses that are most affected.”

To mitigate the economic fallout, employees should be allowed to work from home, the OECD said. It urged governments to step in to support sectors most affected such as travel and tourism, and the car and electronics industries.

It also called for central banks to provide extra liquidity to banks so they can help businesses suffering immediate cashflow problems.

If the epidemic spreads widely, the G20 economies should lead an internationally coordinated framework for health care support, combined with coordinated fiscal and monetary stimulus to rebuild confidence, the OECD’s report said.

Amid trade tensions and political uncertainty, Europe and Japan were already growing slowly before the new coronavirus began to spread.

The prospect of a pandemic sparked a rapid sell-off on stock markets around the globe last week as investors weighed up the impact of factory shutdowns, cancelled flights and disruption to the supply of goods.

The FTSE 100 regained some of the lost ground on Monday morning, trading 1 per cent up on Friday’s close. Markets will gain little comfort from the OECD’s report or from separate data showing a slump in Chinese manufacturing.

Factory activity plunged in February at its fastest rate and to its lowest level on record as anti-virus controls brought some production lines to a standstill.

A monthly purchasing managers’ index released by Caixin magazine fell to 40.3 from January’s 51.1. A reading below 50 indicates output is shrinking.

With many companies and countries reliant on imports of goods from China, the slowdown will begin to impact supplies globally in the coming weeks and months.

What has the OECD said?

Its central or “base” scenario is that global economic growth will be 2.4 per cent this year, down from the 2.9 per cent it had forecast as recently as November. However, it also warns that the economic impact from coronavirus remains very uncertain and growth could fall much further, to 1.5 per cent this year.

Much of this downward revision results from a slowdown in China where factories and cities have been shut down to contain the virus. Countries strongly interconnected with China, such as Japan, Australia and South Korea, will also experience economic damage, the OECD says.

The organisation thinks the most likely scenario is that the effects of the virus will fade relatively soon. If the countries most exposed to coronavirus take effective action to mitigate the impact of coronavirus, global growth could rebound to 3.4 per cent next year.

What about the ‘domino scenario’

The OECD says: “A longer lasting and more intensive coronavirus outbreak, spreading widely throughout the Asia-Pacific region, Europe and North America, would weaken prospects considerably.”

In this scenario, economies in Europe and North America will also experience significant economic fallout from the virus.

Demand is likely to be significantly hit across much of the world for an extended period, with countries accounting for 70 per cent of global GDP likely to be affected.

Other countries may not fully replicate China’s tough restrictions on movement, but many of the economic impacts are likely to be similar. This would significantly damage confidence, causing heightened uncertainty, while voluntary restraints on travel and commercial and sporting events are all likely to depress spending.

On Sunday, the UK health secretary Matt Hancock refused to rule out shutting down cities if the virus spreads widely in the country.

Mr Hancock said he would not take anything “off the table at this stage” when asked about a Wuhan-style quarantine by BBC’s Andrew Marr.

“There’s clearly a huge economic and social downside to that but we don’t take anything off the table at this stage because you’ve got to make sure that you have all of the tools available if that is what’s necessary,” he said.