Zandi, COVID-19 and the world economy

Coronavirs COVID-19. Graphic by TheDigitalArtist/Pixabay.

COVID-19: body blow

by Mark Zandi — chief economist at Moody’s Analytics

The coronavirus has been a body blow to the Chinese economy, which now threatens to take out the entire global economy. A global recession is likely if COVID-19 becomes a pandemic, and the odds of that are uncomfortably high and rising with infections surging in Italy and Korea. The US economy is more insulated from the impact of the virus, but it is not immune, and it too would likely suffer a downturn in this scenario.

A global battering

COVID-19 is battering the global economy in numerous ways. Chinese business travel and tourism has all but stopped; global airlines are not going to China and cruise lines are canceling most Asia-Pacific itineraries. This is a huge problem for major travel destinations, including in the United States, where some three million Chinese tourists visit each year. Chinese tourists to the USA are among the biggest spenders of any foreign tourists. Travel in Europe is also sure to be severely impacted as Milan, Italy, the center of the new infections in that country, is a major travel hub for the Continent.

Shuttered Chinese factories are also a problem for countries and companies fastened into China’s manufacturing supply chain. Apple, Nike and General Motors are some prominent American examples. Shortages of some goods will likely result this spring, meaning higher prices for things we buy at Walmart and on Amazon.

US exports to China will suffer given slumping Chinese demand. China is supposed to ramp up its imports of US products as part of the Phase One trade deal signed by the two countries late last year. How much the Chinese would actually purchase from the United States was already an open question. Given COVID-19, it is even more questionable. President Trump has suggested that the federal government will cut another check to hard-pressed US farmers to make up for the losses.

Commodity slump

Because China is the biggest buyer of many of the world’s commodities, including oil, copper, soybeans and pork, and will be buying a lot less of these and many other things, prices are slumping. Americans will pay less at the gas pump, which is a plus, but it will be hard on the energy, mining and agricultural industries. Emerging economies, especially in Latin America and Africa, that rely on commodity production for their livelihoods will be slammed.

Global businesses can’t seem to catch a break. They have been grappling with the trade war, the Brexit transition, and the economic policy implications of the fast-approaching US presidential election. COVID-19 is now another on this lengthening list of concerns, making it even more likely that already-cautious business executives will continue to sit on new investment and expansion plans. Moreover, they will likely be slow to ramp up their operations, fearful of the implications if they move too quickly and their workers get sick.

Perhaps most significant, stock and bond investors have finally taken note of what the virus means for the global economy. It was one thing when the virus was exclusively a Chinese problem; it is something else altogether if the virus is spreading through the rest of Asia and Europe, with rising odds the entire globe will be infected. The implications will soon come into even stronger relief as multinational corporations begin reporting what the virus has done to their sales and profits. With stock prices trading at record highs just last week, investors aren’t ready for bad news from the companies they are invested in.

The outlook

So, what does this mean for this year’s economic outlook and the risks to that outlook?

Under our baseline (most likely) scenario, which assumes the outbreak remains contained to China and largely plays out by the spring:

China’s economy will contract in the first quarter of this year, and growth for the year will be cut by a full percentage point to 5.4%.

The global economy will suffer a hit to GDP of almost a percentage point (annualized) in the first quarter, and slow by 0.4 percentage point to 2.4% in 2020. For context, global potential growth is an estimated 2.8%.

The US economy will experience growth of only 1.3% in the first quarter (annualized), down by 0.6 percentage point because of the virus. Growth in 2020 is now expected to be 1.7%, down 0.2 percentage point. The US economy’s potential growth is an estimated near 2%.

However, the assumption that the virus will be contained to China appears increasingly tenuous, and the odds of a pandemic are rising. We previously put the odds of a pandemic at 20% (see Alternative Scenario), but we now put them at 40%. A pandemic will result in global and US recessions during the first half of this year. The economy was already fragile before the outbreak and vulnerable to anything that did not stick to script. COVID-19 is way off script.

COVID-19 came out of nowhere. It may be what economists call a black swan — a rare and inherently unforeseeable event with severe consequences. We all hope the global effort to contain the virus will ensure this black swan will not fly. But it is prudent to be prepared if it does.


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