Global study shows sharp reduction in infections in 3rdQ 2020
In a study sponsored by the Gamini Corea Foundation on ‘Global growth impact of COVID-19 outbreak’ an assumption has been made that during the second quarter of 2020 there will be an 80 per cent reduction of the infection and for the third quarter of 2020 a reduction of 99 per cent of infection could be assumed.
The study was made available on April 8 by Dr. Tilak Abeysinghe, Research Director, Gamani Corea Foundation and former Prof. of Economics, National University of Singapore and Dr. Shen Yifan, Asst Professor Institute of Politics and Economics, Nanjing Audit University, China.
In the study, the researchers have said that while no clear data is available, they have made assumptions to calibrate the parameter values and first assumed that the more there are infections in a country, the severe the strain would be on the economy.
Based on this, they use the proportion of COVID-19 infections in each country in the first quarter of 2020 (number of cases in a country divided by the total number of cases in the world) to represent the impact effect of COVID-19 on GDP growth. For the second quarter of 2020 they assume 80 per cent reduction of the infections and for the third quarter 99 per cent reduction. These represent the lagged effect. Note that these are only parameter estimates, the full impact of the COVID19 global shock is generated by running the full model.
The baseline scenario projects mild recessionary conditions that may last two to four years in some countries. However, the duration depends on the severity of the downturn. The best hope is for a V shape recovery if the COVID-19 contagion is contained as assumed and policy interventions for economic recovery work effectively, the study shows.
Second, with the exception of few countries, 80-99 per cent drop in growth results from the international transmission effect (indirect effect), not from the direct impact of COVID19. The countries that are less prone to international transmission of recessionary effects are Germany (75 per cent), China (50 per cent), Iran (39 per cent), and the US (26 per cent).
Third, although the impact growth effect of COVOD-19 is very low for some countries like India, as time goes by, they will also suffer as a result of disruptions to international transactions. The recessionary impact after two years changes the initial ranking pattern completely. More specifically, highly open Singapore is more susceptible to the economic crisis caused by COVID-19 than Sri Lanka.
However, during past crises Singapore rebounded very quickly because of effective and innovative policy interventions. Although Sri Lanka may be less affected relatively, Sri Lanka also needs innovative policy interventions to avoid a protracted downturn. The global economic downturn, instead of just a few countries suffering, generates the need for collective actions. When conditions improve with policy interventions, the international transmission mechanism renders faster recovery to all the countries, the report said.
The study forecast that the economic shock is yet to be seen. On March 16, 2020, China reported that in the two months of January and February alone there was a record 13.5 per cent drop in the factory output. The World Bank, in a study released on March 30 projects the possibility of a massive increase in poverty levels in East Asian and Pacific countries.
The International Labour Organisation, in a study released on April 7, projects massive increase in unemployment globally and call for swift policy actions and open trade regimes. Opinions are abound that dire outcomes in the absence of early policy interventions and some thoughts are that even containing the pandemic quickly does not necessarily lead to a rapid economic recovery.
The economic fallout of the COVID19 outbreak at a global scale is likely to be unprecedented. The researchers thought of engaging in such a global assessment to provide early projections of growth trajectories across countries that can shed some light on what to expect in the absence of policy interventions.
Brief methodology for the analysis
The researchers used a large- scale econometric model which was constructed. It connects quarterly GDP growth of 60 economies (with one more representing the rest of the world) through 3660 bilateral export share series.
For the present analysis they had to modify the model to account for the COVID-19 impact. The COVID-19 shock generates negative growth effects through disturbances to demand and supply channels. On the one hand, increasing healthcare and other related fiscal expenditures is a boost to economic growth. On the other hand, many restrictions such as lockdown, curfew and travel restrictions imposed to contain the contagion entail both demand and supply disruptions at an international level.