Commentary / World

Fiscal stimulus can ease the impact of COVID-19 on the global economy

When the coronavirus outbreak first erupted late last year in Wuhan, China, almost nobody imagined that it would become a serious epidemic, spreading rapidly across the globe. While the reported number of newly infected people appears to be leveling off in China, COVID-19 is becoming a global threat as it spreads at an alarming rate not only in Asia, but also in geographically distant Europe, Latin America, Middle East and Africa. At 3.4 percent, COVID-19’s fatality rate is low and well below the 2003 SARS figure of 11 percent, but the contagion is far more powerful and has spread to more countries.

The coronavirus outbreak will have a more adverse impact on China’s economy than the SARS epidemic did. The latter occurred in the high growth era, which was mainly driven by burgeoning international trade activities and related supply-chain linkages in Asia due to China joining the World Trade Organization in 2001. Greater inflows of foreign direct investment and active manufacturing production and investment projects helped offset the adverse impact of SARS. As a result, China’s real GDP growth avoided a slowdown, rising from 9 percent in 2002 to 10 percent in 2003 and 2004.

In contrast, China’s economy is now on a downward trend due to the country’s aging population and lower productivity growth. This economic slowdown has been exacerbated by U.S.-led trade protectionism, which has weakened China’s trade activities.

Moreover, the coronavirus outbreak is taking a toll on domestic consumption, which has become a main driver to China’s economic growth over the past decade. As a result, economic growth will likely drop from 6.1 percent in 2019 to around 5.5 percent if the coronavirus outbreak can be contained within the first quarter of 2020.

Alternatively, Chinese economic growth could possibly drop to near 5 percent if the outbreak continues until mid-year, as was the case with SARS. This may be problematic for Beijing since the goals of doubling both real GDP and real per capita GDP (measured in Chinese yuan) by 2020 from the 2010 level may not be achievable unless the economic growth rate is closer to 6 percent this year.

The coronavirus outbreak will also take a toll on the global economy. Asia has already been suffering from a sharp decline in demand from China for various goods, services and commodities over the past month. One salient feature this time is that the number of infected people outside of China has already exceeded the corresponding figure for SARS, mainly because of the growing number of outbound tourists from China.

The number of outbound tourists from China was 17 million in 2002, increased to 20 million in 2003 despite the SARS outbreak, and then rose steadily to 150 million by 2018. With rising incomes and a shift to a consumption-based economy, China has become the world’s largest tourism importer in the world. South Korea, Japan, Singapore and other Asian economies are suffering due to their heavy dependence on exports of goods and tourism to China. Downward pressure on economic growth, albeit to a lesser extent, is starting to be felt in the already weak European region.

What actions should the international community take under the circumstances? The outbreak is expected to be short-lived at less than one year. Although the scale of adverse impacts on economic growth differs among countries and regions, collective action may be useful to support small and medium-size enterprises and low-income people in heavily affected sectors such as tourism and manufacturing.

As for monetary policy, the global interest rate environment is already at an unprecedented low level. While only limited room is available for additional monetary easing by major central banks, they could provide cheaper funding to banks that are willing to support distressed sectors and individuals at a lower cost. Central banks in emerging economies could lower interest rates further since their policy rates remain in positive territory, as is already being demonstrated in China, Thailand, Indonesia, and so forth.

Perhaps fiscal policies such as direct cash transfers or subsidies to SMEs and individuals in targeted sectors might be most effective. Prompt actions by governments could help prevent the collapse of affected firms and individuals.

Sayuri Shirai is a visiting scholar to the Asian Development Institute and a professor of Keio University.

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