{ "id": "IN11235", "type": "CRS Insight", "typeId": "INSIGHTS", "number": "IN11235", "active": true, "source": "EveryCRSReport.com", "versions": [ { "source": "EveryCRSReport.com", "id": 619492, "date": "2020-03-11", "retrieved": "2020-03-13T13:13:00.273469", "title": "COVID-19: Potential Economic Effects", "summary": "This Insight discusses the potential economic effects of the coronavirus (COVID-19) on the U.S. economy. For background on the coronavirus, see CRS In Focus IF11421, COVID-19: Global Implications and Responses, by Sara M. Tharakan et al. \nChannels Through Which the Virus Could Affect the Economy\nAlthough the COVID-19 outbreak presently is most widespread abroad, it will directly affect foreign demand for U.S. exports of goods and services. As discussed in this CRS In Focus, the coronavirus could also disrupt U.S. companies\u2019 international supply chains. If COVID-19 becomes widespread in the United States, it could directly reduce domestic economic activity by reducing both supply and demand. On the supply side, hours worked would be reduced by illnesses and fatalities and any work stoppages to prevent the virus from spreading. On the demand side, spending could be reduced by quarantines and other attempts to avoid crowds, such as public event cancellations. In addition, fear and uncertainty could reduce business and consumer confidence, leading to a reduction in spending. A reduction in investor confidence could also tighten financial conditions. For example, the sharp decline in the stock market since late February 2020 was widely perceived to be in response to worsening news about the virus. In general, these macroeconomic effects would be expected to eventually reverse once conditions return to normal, except to the extent COVID-19 causes worker fatalities.\nUnknowns in Evaluating the Economic Impact\nHow large could the economic effects of the coronavirus ultimately be? At this stage, uncertainty is so great that a very wide range of economic outcomes\u2014from little effect on the U.S. economy to a severe downturn\u2014is plausible. The unknowns include the following questions: \nHow many people will become infected over the course of the outbreak in the United States and abroad?\nHow long will the outbreak last?\nWhat public and private measures will ultimately be taken that disrupt normal economic activity (e.g., travel restrictions, closures, shutdowns, cancellations)?\nHow easily can businesses find substitutes for supply chain disruptions?\nHow many businesses will fail before the outbreak ends?\nHow will consumer and investor confidence be affected?\nWhat fiscal or monetary policy actions will ultimately be taken to offset the economic effects, and how effective would they be in a pandemic? To date, an emergency supplemental appropriation has been enacted (P.L. 116-123), and the Federal Reserve has reduced interest rates by 0.5 percentage points.\nEconomic Estimates\nTwo recent studies attempt to quantify the potential economic effects of the outbreak. The purpose of these studies is to illustrate how the economy would be affected under different outbreak scenarios rather than to provide the best projection of the outbreak\u2019s scope. \nOECD. In its base-case scenario\u2014a contained outbreak centered in China\u2014the Organisation for Economic Co-operation and Development (OECD) stated \u201cglobal GDP growth is projected to slow from 2.9% in 2019 to 2.4% this year, before picking up to around 3\u00bc per cent in 2021 as the effects of the coronavirus fade and output gradually recovers.\u201d In this scenario, U.S. growth is only 0.1 percentage points lower in 2020 and is 0.1 percentage points higher in 2021. Despite the negative impact of COVID-19, the OECD projects a global recession is averted as growth remains positive in all the major economies\u2014including China\u2014except Italy. The base-case scenario assumes the outbreak peaks in the first quarter of 2020 and gradually fades thereafter. (The OECD did not report specific estimates on the number of illnesses or fatalities.) The base-case scenario also incorporates an assumption that monetary stimulus is used around the world to offset the negative effects.\nThe OECD also presents a \u201cdomino scenario\u201d where the virus \u201cspread much more intensively ... through the wider Asia-Pacific region and the major advanced economies in the northern hemisphere.\u201d In this scenario, \u201cthe level of world GDP is reduced by up to 1\u00be per cent (relative to baseline) at the peak of the shock in the latter half of 2020, with the full year impact on global GDP growth in 2020 being close to 1\u00bd per cent.\u201d The OECD does not present an estimate for the effect on U.S. growth in the domino scenario, but growth in North America would decline by 1.5 percentage points. Figure 1 illustrates both scenarios presented by the OECD. \nFigure 1. Projected Decline in 2020 GDP Growth Under Two Scenarios\nOECD\n/\nSource: Organisation for Economic Co-operation and Development (OECD).\nNotes: *For the domino scenario, \u201cU.S.\u201d is for North America.\nMcKibbin and Fernando. A Brookings Institution working paper by Warwick McKibbin and Roshen Fernando used a long-standing economic forecasting model developed by one of the authors to simulate economic effects under seven different outbreak scenarios\u2014three that limit the outbreak to China and four in which the outbreak is worldwide. (The paper does not provide the relative likelihood of the various scenarios.) The model projects that \u201ceven a low-end pandemic modeled on the Hong Kong Flu is expected to reduce global GDP by around $2.4 trillion and a more serious outbreak similar to the Spanish flu reduces global GDP by over $9 trillion in 2020.\u201d The loss in U.S. GDP relative to the 2020 baseline varies between 0.1%-8.4% across the scenarios. The scenarios assume a decline in the labor supply of 0.1%-3.44% in China and 0%-1.3% in the United States. \nTable 1. Projected Decrease in 2020 GDP Under Various Scenarios\nMcKibbin and Fernando\n\n\nDecrease in 2020 GDP Relative to Baseline\n\nScenario\nCOVID-19 Deaths\nUnited States \nChina \n\nScenario 1\nChina: 279\n-0.1\n-0.4\n\nScenario 2\nChina: 3,493\n-0.1\n-1.9\n\nScenario 3\nChina: 12,573\n-0.2\n-6.0\n\nScenario 4\nChina: 2,794; U.S.: 236\n-2.0\n-1.6\n\nScenario 5\nChina: 6,985; U.S.: 589\n-4.8\n-3.6\n\nScenario 6\nChina: 12,573; U.S.: 1,060\n-8.4\n-6.2\n\nScenario 7\nChina: 2,794; U.S.: 236\n-1.5\n-2.2\n\nSource: McKibbon and Fernando\nNotes: In Scenarios 1-3, the mortality rate for the rest of the world is negligible. In Scenario 7, the outbreak recurs annually; in the other scenarios, it is a one-time outbreak.\nU.S. and global growth had been projected to be moderate before the outbreak. Therefore, the economic effects of COVID-19 could result in a growth slowdown but would have to be large for the economy to contract, as the forecasts above illustrate. The estimated effects presented above are for the whole year; it is expected, however, that the economic effects will be larger in the first half of the year.", "type": "CRS Insight", "typeId": "INSIGHTS", "active": true, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "https://www.crs.gov/Reports/IN11235", "sha1": "004586735ebdc58e8fd38e25856be14a18757365", "filename": "files/20200311_IN11235_004586735ebdc58e8fd38e25856be14a18757365.html", "images": {} }, { "format": "PDF", "encoding": null, "url": "https://www.crs.gov/Reports/pdf/IN11235", "sha1": "da39a3ee5e6b4b0d3255bfef95601890afd80709", "filename": "files/20200311_IN11235_da39a3ee5e6b4b0d3255bfef95601890afd80709.pdf", "images": {} } ], "topics": [] } ], "topics": [ "CRS Insights" ] }