The Potential Impact of COVID-19 on GDP and Trade



Maryla Maliszewska, Aaditya Mattoo, and Dominique van der Mensbrugghe | World Bank

As the coronavirus emerged in China and spread globally, authorities have acted to limit its spread. Experience with similar diseases reveals that while the human costs are significant, the bulk of the economic costs are due to the preventive behavior of individuals and the transmission control policies of governments (Brahmbhatt and Dutta, 2008). Current experience is no different.

As the virus spread internationally, many countries have already taken or will eventually take action to limit the spread, through social isolation policies, such as shutting educational institutions, limiting work and restricting the mobility of people. The preventive actions have had an immediate and significant impact on all economies, and through trade and tourism, on partner economies.

Economic models can be used to model the consequences of pandemics (Burns et. al. (2006), Bloom et. al. (2005), Lee and McKibbin (2004), McKibbin et. al. (2006), Evans et. al. (2014)). Building on previous studies, this paper focuses on four channels—i) the direct impact of a reduction in employment; ii) the increase in costs of international transactions; iii) the sharp drop in travel; and iv) the decline in demand for services that require proximity between people.

We consider two scenarios: a global pandemic and an amplified global pandemic. In the case of the global pandemic, it is assumed that countries bear only one-half of the impact of the full China shock. In the case of the amplified global pandemic, the shocks are uniform across all countries.

A baseline global pandemic scenario sees GDP of the world fall by 2 percent below the baseline, of developing countries by 2.5 percent, and of industrial countries by 1.8 percent. The declines are nearly twice as large in an amplified pandemic scenario in which containment is assumed to take longer.

It is still too early to make an assessment of the impact of the virus based on full statistical evidence. High frequency data are providing some indicators, but it is hard to assess the depth and the breadth of the pandemic as it spreads, and to precisely estimate how long it will take countries to return to normal activity levels.

This paper seeks to illustrate the transmission channels and heterogenous impact of COVID19 on output and trade in different scenarios. The results presented here should be regarded as scenario analyses, not as projections. The implemented shocks are illustrative and based on previous episodes of global epidemics or on preliminary data.

The assumptions on the spread of the disease are not grounded in epidemiological projections, they do not take into consideration the quality of the health systems in the affected countries, transport connections to affected countries, and health policy responses to the outbreak.

The model incorporates the decline in demand due to reduced production and incomes but does not fully capture the independent contraction in demand, except for the reductions in tourism and other services that require close human contact. It also does not include the decline in investor confidence and any financial repercussions.

We capture some aspects of global value chains trade, but a fuller analysis will require a richer data set. This analysis will evolve as we fine tune assumptions in line with early impacts and evaluate potential scenarios of the spread of the virus.




To view the full report, click here.