Economic Outlook

World Economy Under Strain

Kiel Institute Economic Outlook World, Nr. 63 (2020 | Q1)

In early 2020 the world economy is severely affected by the consequences of a novel coronavirus and the measures implemented to arrest its spreading. With the progressive diffusion around the globe, action designed to contain the disease are weighing on economic activity in an increasing number of countries and are adding to the significant negative impact on growth from the steep decline of production in China, where the virus originates. Our previous call for a gradual acceleration of global growth has been radically revised, and we now expect world output to decline in the first half of this year. Asia and Europe, where the diffusion of the virus has progressed most and the probability of disruptions of production through breaks in the value chains is particularly high, are currently especially affected. Commodity exporters are hit by a substantial decline in raw material prices. Even under optimistic assumptions about the progress of the disease, which would allow for a rapid recovery of activity in the second half of the year, and despite significant support from macroeconomic policies, we expect global growth to decline from 3.0 percent in 2019 to just 2.0 percent in 2020, the lowest rate of growth since the Great Recession in 2009. In our benign scenario of a swift normalization of conditions for economic activity, output would rise by 4 percent next year. Thus we have revised down our forecast from December down by 1.1 percentage points for 2020 and up by 0.6 percentage points for 2021.The risks for a stronger and more prolonged downturn in global growth are pronounced, especially in the case that the containment of the virus takes longer than assumed or the outbreak of the epidemic is repeated before effective drugs or vaccines are available.