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Economic Update: Global Impact of Coronavirus

Although it is still early days, economists are starting to map out scenarios for the months ahead and to analyse the impact of Coronavirus on economic activity around the world. And it all makes for some pretty scary reading!

The World Trade Organisation has predicted that global trade in 2020 could decline by at least 13%, and by as much as 32% in the worst case scenario, and the IMF has predicted that we are heading into the deepest recession since the Great Depression.

The IMF now expects the global economy to shrink by 3% in 2020, which is a much larger fall than was recorded during the financial market crisis. And, here in the UK, the Office for Budget Responsibility (OBR) has outlined a scenario in which UK economic activity is expected to plunge by 35% in Q2, meaning that a third of economic activity is effectively lost during that 13 week period. The OBR expects the economy to shrink by almost 13% during 2020 as a whole.

All scenarios and forecasts expect government debt to rise significantly to compensate for the loss of tax revenue and to pay for the fiscal policy being introduced. This presents a huge challenge for policy makers in the Euro area. Should each country be responsible for issuing its own debt, allowing disparities between countries to become even greater and making it almost impossible to introduce policy suitable for all member states? Or should the whole of the Euro area share the burden of fighting this virus, issuing ‘Coronabonds’ which would help ease the economic pain in the economies most affected by the virus, but at the expense of the wealthier countries in the region?

From a purely economic point of view, we want the lockdowns to be as short as is feasible without putting people at risk. Here in the UK, where we are 2-3 weeks behind, we can now learn from the experiences of China and some of our European neighbours when it comes time to start designing our own exit strategy.

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