The economic costs of the coronavirus are growing – but it is still too early for a serious prediction

The coronavirus is causing increasing losses of human lives, tragedies, and inconveniences for many people in China and elsewhere.

It is still too early to precisely assess the economic consequences of the coronavirus. But obviously, the longer it lasts the more serious will be its consequences. It is now clear that in the first quarter of 2020, not only economic growth in China, but also in the U.S. and globally will be negatively affected by the coronavirus. Under a serious scenario, we might even see stagnation or negative economic growth rates.

Various firms in China cannot resume work, because their workforce is still quarantined or production inputs are missing. One may expect that at least some of these firms will face liquidity problems. As a result of these developments, global supply chains will be increasingly hampered if these firms cannot resume work soon. The Chinese government has already rolled out various measures to support the economy, which can be expected to dampen any negative effects of the coronavirus.

Under these circumstances, it is increasingly unlikely that the Chinese government will be able to fulfill its commitments under the so-called “Phase One” trade agreement with the United States. While it is unlikely that the U.S. government will impose any retaliatory measures against the background of this pandemic, it is probable that negotiations on further trade agreements between the two countries will be delayed.

Some observers point out that there is increasing risk of stagflation (an increase in inflation and a parallel stagnation of the economy). A decrease in supply due to factory closures tends to increase inflation and reduces economic output at the same time. One may expect that such stagflationary effects could be also observed in other countries. The extent will obviously depend on how long and serious the coronavirus will finally be. Again, it is too early to make precise and prematurely pessimistic forecasts for the global economy. But there are increasing downside risks for the global economy.

February 15, 2020

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