April 14, 2020
Introduction and key messages
The increasing spread of the coronavirus across countries has prompted many governments to introduce unprecedented measures to contain the epidemic. These are priority measures that are imposed by a sanitary situation, which leave little room for other options as health should remain the primary concern. These measures have led to many businesses being shut down temporarily, widespread restrictions on travel and mobility, financial market turmoil, an erosion of confidence and heighted uncertainty.
In a rapidly changing environment, it is extremely difficult to quantify the exact magnitude of the impact of these measures on GDP growth, but is clear that they imply sharp contractions in the level of output, household spending, corporate investment and international trade. This note provides illustrative estimates of the initial direct impact of shutdowns, based on an analysis of sectoral output and consumption patterns across countries and an assumption of common effects within each sector and spending category in all countries.
• This approach suggests that the initial direct impact of the shutdowns could be a decline in the level of output of between one-fifth to one-quarter in many economies, with consumers’ expenditure potentially dropping by around one-third.Changes of this magnitude would far outweigh anything experienced during the global financial crisis in 2008-09. This broad estimate only covers the initial direct impact in the sectors involved and does not take into account any additional indirect impacts that may arise.
These are only the initial impacts on the level of output. The implications for annual GDP growth will depend on many factors, including the magnitude and duration of national shutdowns, the extent of reduced demand for goods and services in other parts of the economy, and the speed at which significant fiscal and monetary policy support takes effect. Nonetheless, it is clear that the impact of the shutdowns will weaken short-term growth prospects substantially.
• The scale of the estimated decline in the level of output is such that it is equivalent to a decline in annual GDP growth of up to 2 percentage points for each month that strict containment measures continue. If the shutdown continued for three months, with no offsetting factors, annual GDP growth could be between 4-6 percentage points lower than it otherwise might have been.
These estimates are one approach to quantifying the initial impact of containment measures on activity, and do not utilise the full range of data that inform the projections of economic growth in the OECD Economic Outlook. However, their message of sharp initial declines in activity across countries following shutdowns and restrictions on mobility is very similar to that emerging from business surveys, high-frequency daily indicators, and the sharp output contraction observed already in China this year.
Considerable uncertainty remains about the duration and magnitude of confinement measures and the extent to which they may be implemented in a similar manner across countries. Even once they begin to be eased, the extent of any subsequent recovery in output will depend on the effectiveness of the policy actions taken to support workers and companies through the downturn and the extent to which confidence returns.
Compliments of the OECD.