Economy

Growth in Mexico and Argentina will be hit by coronavirus, warns OECD

New economic outlook released by the organization says the outbreak is the greatest danger to world GDP since the global financial crisis

Confirmed cases of coronavirus in Latin America are surging. Photo: Shutterstock

LABS

02.Mar.2020 15:02 BRT
UPDATED 05.Mar.2020 11:32 BRT

The global economy is set to grow only 2.4% this year, the lowest since 2009;
If the situation deteriorates, a coordinated response of central bank easing and fiscal stimulus will likely ensue.

The coronavirus outbreak presents the world economy with its greatest danger since the global financial crisis of 2008-09, according to the Organization for Economic Cooperation and Development (OECD). Mexico and Argentina, two of Latin America’s biggest markets, are also being hit by the health crisis, with GDP forecasts being trimmed for 2020.

Mexican economy is now expected to grow a mere 0.7%, a decline of half a percentage point since OECD’s last report in November. Argentina is set to plunge deeper into its recession, with a contraction of 2%, a result 0.3% worse than previously expected. For Brazil, Latin American biggest economy, the growth forecast was maintained at 1.7% in 2020, suggesting its output will not be as affected as other countries in the region – mainly because foreign trade represents a smaller slice of Brazilian GDP.

Though their particular figures were not included in OECD’s latest outlook, Chile and Peru can potentially feel a more severe downturn due to their economies’ bigger exposure to trade with China.

Global downturn

The global economy is set to grow only 2.4% this year, the lowest since 2009 and down from a forecast of 2.9% in November. That’s a much gloomier prediction than the one International Monetary Fund (IMF) presented a week ago, when it said the virus would cut off just 0.1% from global growth. The next World Economic Outlook, to be published by the IMF in April, will likely show a darker picture: “We are likely to downgrade our growth projections for the world,” IMF spokesman Gerry Rice told recently.

The OECD went further still and also presented a “domino” prospect scenario, in which contagion is more widespread in Asia, Europe and North America. This could cut global growth to as low as 1.5% this year, halving the OECD’s previous 2020 projection.

Presenting the outlook in Paris, OECD Chief Economist Laurence Boone said: “The virus risks giving a further blow to a global economy that was already weakened by trade and political tensions. Governments need to act immediately to contain the epidemic, support the health care system, protect people, shore up demand and provide a financial lifeline to households and businesses that are most affected.”

China’s greater role

Compared to similar events in the past, such as the SARS outbreak of 2003, the economic contagion is reaching a higher level.

“The global economy has become substantially more interconnected, and China plays a far greater role in global output, trade, tourism and commodity markets.”
OECD Interim Outlook

For Latin America in particular, trade with China grew exponentially in the last decades. In total, Chinese imports and exports with the region rose from $17 billion in 2002 to $306 billion in 2018.

“Output contractions in China are being felt around the world as the outbreak batters production, trade, tourism and business travel”, the 36-member OECD said.

Central banks

Officials with the U.S. Federal Reserve, European Central Bank and Bank of Japan (BoJ) have signalled in recent days that they stand ready to do more if needed.

If the situation deteriorates, a coordinated response of central bank easing and fiscal stimulus amounting to 0.5% of economic output in G20 countries could lead to 1.2% higher growth within two years, the OECD calculated.

In an emergency statement, governor Haruhiko Kuroda of the BoJ said it will “strive to provide ample liquidity and ensure stability in financial markets.” The Bank of England followed by saying it’s working with U.K. and international authorities to “ensure all necessary steps are taken to protect financial and monetary stability.”

Last Friday, Fed chairman Jerome Powell suggested further cutting interest rates to contain what he called the “evolving risks” to economic growth from the virus.

Action needed

According to the OECD, governments could also help by providing unemployment insurance for workers placed on unpaid leave and by covering virus-related health costs for all.

Measures that reduce or delay tax or debt payments or lower energy costs for firms in hard-hit regions and sectors should be considered, the OECD said, as well as temporary reductions in the level of reserves that banks are required to hold at the central bank.

Other risks for the economy, it said, include the trade tensions between the United States and China, and uncertainty about the future trade relationship between the European Union and Britain in the wake of Brexit.