At the start of this year, things seemed to be looking up for the global economy. True, growth had slowed a bit in 2019: from 2.9% to 2.3% in the United States, and from 3.6% to 2.9% globally. Still, there had been no recession, and as recently as January, the International Monetary Fund projected a global growth rebound in 2020. The new coronavirus, COVID-19, has changed all of that.

Early predictions about COVID-19’s economic impact were reassuring. Similar epidemics – such as the 2003 outbreak of severe acute respiratory syndrome (SARS), another China-born coronavirus – did little damage globally. At the country level, GDP growth took a hit, but quickly bounced back, as consumers released pent-up demand and firms rushed to fill back orders and re-stock inventories.

It is becoming increasingly clear, however, that this new coronavirus is likely to do much more damage than SARS. Not only has COVID-19 already caused more deaths than its predecessor; its economic consequences are likely to be compounded by unfavorable conditions – beginning with China’s increased economic vulnerability.

China’s economy has grown significantly more slowly in the last decade than it did previously. Of course, after decades of double-digit growth, that was to be expected, and China has managed to avoid a hard landing. But Chinese banks hold large amounts of non-performing loans – a source of major risks.

As the COVID-19 outbreak disrupts economic activity – owing partly to the unprecedented quarantining of huge subsets of the population – there is reason to expect a sharp slowdown this year, with growth falling significantly below last year’s official rate of 6.1%. During the recent meeting of G20 finance ministers, the IMF downgraded its growth forecast for China to 5.6% for 2020 – its lowest level since 1990.

This could hamper global growth considerably, because the world economy is more dependent on China than ever. In 2003, China constituted only 4% of global GDP; today, that figure stands at 17% (at current exchange rates).

Moreover, because China is a global supply-chain hub, disruptions there undermine output elsewhere. Commodity exporters – including Australia, and most of Africa, Latin America, and the Middle East – are likely to be affected the most, as China tends to be their largest customer. But all of China’s major trading partners are vulnerable.

For example, Japan’s economy already contracted at an annualized rate of 6.3% in the fourth quarter of 2019, owing to last October’s consumption-tax hike. Add to that the loss of trade with China, and a recession – defined as two consecutive quarters of shrinking GDP – now seems likely.

European manufacturing could also suffer considerably. Europe is more dependent on trade than, say, the United States, and is linked even more extensively to China through a web of supply chains. While Germany narrowly escaped recession last year, it might not be so lucky this year, especially if it fails to undertake some fiscal expansion. As for the United Kingdom, Brexit may finally have the long-feared economic consequences.

All of this could happen even if COVID-19 does not become a full-blown pandemic. In fact, while the virus is proliferating in some countries, such as South Korea, a high infection rate is not a prerequisite for economic hardship. The specter of contagious disease tends to have a disproportionate impact on economic activity, because healthy people avoid traveling, shopping, and even going to work.

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