Coronavirus crisis will have significant economic fallout, says IMF senior expert

According to her, substantial targeted policies are needed to support the economy through the epidemic, keeping intact the web of economic and financial relationships between workers and businesses, lenders and borrowers, and suppliers and end-users for activity to recover once the outbreak fades.  The goal is to prevent a temporary crisis from permanently harming people and firms through job losses and bankruptcies.

The human costs of the coronavirus outbreak have risen at an alarming rate and the disease is spreading across more countries.

IMF senior expert notes that the first priority is clearly to keep people as healthy and safe as possible.  Countries can help by spending more to boost their health systems, including on personal protective equipment, screening, diagnostic tests, and additional hospital beds.

Without a vaccine to stop the virus, countries have taken measures to limit its spread, like travel restrictions, temporary school closures, and quarantines.  Such measures also buy valuable time to avoid overwhelming health systems, according to her.

The economic impact is already visible in the countries most affected by the outbreak.  For example, in China, manufacturing and service sector activity declined dramatically in February, Ms. Gopinath notes. 

The global supply and demand for dry bulk shipping stocks such as building materials and commodities has also dropped similar to during the most acute phase of the global financial crisis, reflecting curtailed economic activity associated with the unprecedented containment effort.  This drop was not seen in recent epidemics or after the 9/11 attacks.

The coronavirus epidemic involves both supply and demand shocks.  Business disruptions have lowered production, creating shocks to supply.  And consumers’ and businesses’ reluctance to spend has lowered demand, according to her.

In addition, firms that rely on supply chains may be unable to get the parts they need, whether domestically or internationally.  For example, China is an important supplier of intermediate goods to the rest of the world, particularly in electronics, automobiles, and machinery and equipment, IM expert said, noting that the disruption there is already having knock-on effects to downstream firms.  Together, these disruptions reportedly contribute to a rise in business costs and constitute a negative productivity shock, reducing economic activity.

As seen in recent days, borrowing costs can rise and financial conditions tighten, as banks suspect consumers and firms may be unable to repay their loans on a timely basis. Higher borrowing costs will expose financial vulnerabilities that have accumulated during years of low interest rates, leading to a heightened risk that debt cannot be rolled over. A reduction of credit could amplify the downturn arising from the supply and demand shocks.

And when these shocks are synchronized across many countries, the effects can be further amplified through international trade and financial linkages, dampening global activity and pushing commodity prices down, Ms. Gopinath stresses.  Oil prices have fallen dramatically in recent weeks and are about 30 percent below their levels at the start of the year. Countries reliant on external financing could find themselves at risk of sudden stops and disorderly market conditions, possibly requiring foreign exchange intervention or temporary capital flow measures.

Considering that the economic fallout reflects particularly acute shocks in specific sectors, policymakers will need to implement substantial targeted fiscal, monetary, and financial market measures to help affected households and businesses.

Households and businesses hit by supply disruptions and a drop in demand could be targeted to receive cash transfers, wage subsidies, and tax relief, helping people to meet their needs and businesses to stay afloat.

Central banks should be ready to provide ample liquidity to banks and nonbank finance companies, particularly to those lending to small- and medium-sized enterprises, which may be less prepared to withstand a sharp disruption. Governments could offer temporary and targeted credit guarantees for the near-term liquidity needs of these firms.

Broader monetary stimulus such as policy rate cuts or asset purchases can lift confidence and support financial markets if there is a marked risk of a sizable tightening in financial conditions (with actions by large central banks also generating favorable spillovers for vulnerable countries). 

Considering the epidemic’s broad reach across many countries, the extensive cross-border economic linkages, as well as the large confidence effects impacting economic activity and financial and commodity markets, the argument for a coordinated, international response is clear.  The international community must help countries with limited health capacity avert a humanitarian disaster.  The IMF stands ready to support vulnerable countries with different lending facilities, including through rapid-disbursing emergency financing, which could amount up to $50 billion for low-income and emerging market countries.

Ms. Gita Gopinath is the Economic Counselor and Director of the Research Department at the International Monetary Fund (IMF).  She is on leave of public service from Harvard University’s Economics department where she is the John Zwaanstra Professor of International Studies and of Economics.