Written by Qiu Yuanping

Senior Advisor of the Institute for Global Cooperation and Understanding(iGCU), PKU

Standing Committee Member of the CPPCC

Fomer Director of Overseas Chinese Affairs Office of the State Council

COVID-19, declared as a pandemic by the World Health Organization, is spreading rapidly and throwing the world into a panic. The nearly uncontrollable complex situation has severely impacted the globaleconomy,society,politics and security. Besidescontainment of theepidemic,we are thinking primarily about the potential impact it will have on the world economy. There is much debate among political scientists and economists. Willthe economy head toward a depression, recession or crisis? Willthevolatility of the financial market lead to another financial crisis? How will the global industrial chain, supply chain, and service chain change? Will the ripple effects of global economic shocksreachother areas? Although there is much uncertainty about the progression of the epidemic, Iwould like to use two different time variables, one in which the pandemic is contained within six months, the other within a year, to make a preliminary forecast and assessment. The analysis is as follows:

I.An economic downturn is inevitable, withrisk of depression or even recession.

In recent years, the world economy has been characterized by low growth, low inflation, low interest rates, high debt, and high risk. With so many uncertain and unstable factors, the pandemic has made everything even worse.As the pandemic islikely to remain for thetime being,both international flowof factors andsocial andeconomic activitieshavestagnated or slowed down. Supply and demandhaveshrunk, impacting industries ranging from service industries like tourism,catering, hotels and transportation, as well as industries with global supply chains such as pharmaceuticals, semiconductors, electromechanical equipment, automobiles and automobile parts, chemicals, and transportation equipment.

International trade and cross-border investment are struggling. Prices ofoil and other commodities are fluctuating. As panic and risk aversion rise in the international community, the financial market is experiencing extreme volatility, and the risk ofglobaleconomic turbulence is soaring. Countries are considering and employing measures to brace for the impact of the pandemic and the economic downturn. Central banks in the United States, Canada and the United Kingdomhavecut interest rates.Euro-area finance ministershaveannounced that they will mobilize all available policy tools to boost the regionaleconomy. The European Union (EU) is considering an aid packagefor Italy. The International Monetary Fundand the World Bankhavealso promised to provide loans or financial assistance in other forms.

However, governments do not havea magic solution to mitigate their losses, and their respective efforts remain uncoordinated, whichonlyexacerbates public fear of the pandemic.One international economic organization has lowered the global GDP growthprediction by 0.4% to1% — a relatively optimisticand only preliminary prediction. S&P, a credit rating agency, estimates that the pandemic couldtake a toll ofUSD 200 billionon Asian-Pacific economies. While an economic downturnseems to be inevitable, whetherthe epidemic will trigger a world economic depression is still in question.Based onthe trajectory following the SARS outbreak in 2003and the international financial crisis in 2008, it is possible that we may contain the virus in the near future.Additionally, giventhat the major economies haveboththe experience and policy tools to deal with this kind of crisis, significant negative growth, large-scale recession, or a global crisis areunlikely.

II. Global industrial and supply chains reshuffleas the pandemic unfolds.

The advancement of economic globalizationhasbrought countries into a symbiotic system, withthechains ofindustry, supply, capital and serviceclosely interlocked and interacting with one another.The containment measures taken worldwide have limited the flow of factors, hampered cross-border social andeconomic activities, anddampenedtheworld’s integrated logistics system and cross-border channels. As a result, factories worldwide have partially halted ordownsized production, or even gone intobankruptcy.In this sense, the containment measureshave impacted domestic, regional and global industrial chains, supply chains, and service chains in three areas, namelyin the supply of means of production,supply ofcapital, and consumerdemand.

Major economies such as China, Japan, South Korea, Europe and the United States have taken some emergency control measures.The upstream supply of raw materials, midstream processing and manufacturing,anddownstream assembly and sales have all demonstrated a decline insupply capacity, breaking of industrial chains,and reduction indemand to varying degrees. In the three production networks, namely East Asia, Europe and North America, the cross-border trade in goods, services, e-commerce and digital businesshave been hindered, endangering thesecurity and stability of the global industrial and supply chains.

Optimistically, if the epidemiccan be brought under controlwithin a short period of time (say,the first half of this year), the logistics and shippingindustryrebounds quickly, and the East Asian production network relying on China’s manufacturing capacity returns back to normal, the global industrial chain and supply chain willsurvive a fatal blow. Pessimistically, if the epidemic lasts longer (7 months to 1 year), multinational enterprises will seriously consider transferring relevant industries to countries with low epidemic risks or those with significantcomparative advantages, such as the ASEANcountries, and the supply chains in Europe and North America will be more localized, regionalized and decentralized.AsEuropean and American businesses had originally intended toincreaseinvestment in intermediary goods manufacturing amidst China-US trade frictions, under the aforementioned scenario,some of themmight actuallyreturn to theirhome countries or regions.Hence, whoever gains from the restructuring of the global industrial and supply chains will depend a lot on the time span of the pandemic.

III.As the financial marketsfluctuate,the risk ofa global financial crisisincreases.

In the early stage of theepidemic’s outbreak, the international financial market wasconcerned aboutits impact, asreflected in the rise of USTreasury bond yields, the appreciation of theJapanese yen,as well asthe fall of the stock market and gold prices.TheUS Federal Reserve cut interest rates by 50 bps on March 3 to cope with the “risks toeconomic activities”posed by the epidemic. On March 7, after Saudi Arabia provoked a price war on oil, international oil prices plummeted, and the day was dubbed as “Black Monday.” The US stock market triggered circuit breakers twicewithin one week, and three major stock indexesfell into the technical bear market territory. Stock markets in eight countries andtheHong KongSARalso tripped circuit breakers, and more than 20 countriesslid into the technical bear market, creating extreme volatility in the global stock market and energy market.

Besides market panic and the contagious effect of the stock market, the fall of US stocks also reflects investors’ anxiety about Trump’s pandemic prevention policies.Unlike SARS, the COVID-19pandemic endangers the security of the real economy and the global industrial chain, and thusmakes people more worried. If the pandemicspreads further in the US, and the stock market drops by 10 percent for severalconsecutiveweeks, the US Treasury will have to intervene with a bailout.Nevertheless, this will spur another wave of volatility in the US bond market. Thequantitative easing policy andtherisk aversion sentiment have sharply brought down Treasury bond yields andheightened regional risks of bond default. As the stock market tends to be dragged down by the bond market and vice versa,oncethe derivativesmeet liquidityproblems, there will be a markeddepreciation of the US dollar andgreatfluctuations in the exchange rate market. In addition,the fact that global enterprises arehighly vulnerable to cash flow problems could cause marked volatility inthe international financial market, which could lead to a viciouscycle. Under extreme circumstances, some countries might resort to extreme measures such as currency wars, debt freezing,or wartime financial regulation.

IV.Ripple effects can reachother areas, dealing a greater blow to the world economy.

In this situation, we need to pay great attention to three risks. First is the uncertaintyof America’sgeneralelection. The US presidential electionwill take place in the second half of this year. Against the backdrop of the pandemic andthevolatility of global economy, uncertainties in this regard willgreatly influence the world’s political and economiclandscape.The second is the geopolitical risks in the Middle East and Iran.The Iranepidemic, internal conflict, American sanctions, regionalwarfare, and oil price war will make the situation in the Middle East more complicated, posing risks of an energy crisisor a local war. The third is the risk of economic recession and political consequences in the EU. European countries are almost overwhelmed by the pandemic. Thealreadyfragile European economy may experience negative growth.The impact of the outbreak and economic recession onregional politics andtheadvancement of Europeanintegration should not be underestimated.

The pandemic’s impact on the world economy has a lot to do withthe time span, scale and countries’ containment capability. In terms of containment, China, Japan and South Korea are doing well, developed European countries are generally faring well,whilesome developing countries aresuffering heavily due to ineffective control measures. The US seems tohave stayed calm, but the situation is worrisome. To get a clear understanding of the world’s economic situation, we should focus onthree aspects: first,the timeframe and scale of the pandemic; second, the US economy and financial market; third, changes in the global capital chain, industrial chain, supply chain, and service chain.We should be prepared forchanges and risks emerging indifferent periods. In particular,asthe pandemic evolves in the interaction between China and the world,we can identify the prominentcharacteristics of economic globalization andalso the important roleChina plays in the process. We must coordinate domestically and internationally, turn crises into opportunities,andseek benefitswhile avoiding disadvantages with a broader vision and a long-term perspective.