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The perverse equation of an epidemic for growth

  • 9 March 2020
  • Philippe Waechter
  • Coronavirus
  • Epidemic
  • Growth momentum
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Growth is doomed until uncertainty about the magnitude, duration and contagion of the epidemic is reduced. The responses, although rational, accentuate the risk of recession.

Economic growth will frankly slow in 2020 and the coronavirus epidemic is fully responsible for it.

There are four points to consider:
The first is the blocking of production chains from China. Companies, all over the world, are no longer delivered as quickly and as completely as they usually are. They can no longer produce as much. The manufacturing sector is frankly weakened.
The second is that this uncertain environment (duration, contagion and extent of the epidemic are not known), everyone behaves more cautiously. Businesses are waiting to invest and hire and households are delaying the time to change their washing machine or car. The demand is unraveling.
The third aspect is stopping travel, which was at the heart of globalization. All of a sudden, everyone stays confined to their home. Demands for transport, hotels and restaurants are inexorably retreating, penalizing the festive and professional tourism activity.
The fourth point is that to avoid internal contagion, governments decide to suspend demonstrations gathering more than 1000 people whether they are sports or shows. A whole section of the economy is penalized.

These 4 factors constrain the growth of the economic activity. There is no source of momentum that can drive short-term expansion and reverse the trend. In addition, what factors would be likely to counteract the recessive effect of the 4 points mentioned above? As long as there is uncertainty about the duration, contagion and magnitude of the epidemic, there is a determinism that growth will slow down and that activity may contract.
The authorities can limit the risks but not revive growth because the supply is limited in the short term.
Strange period during which we observe growth slowing down while, in order to limit contagion, governments take rational measures that will slow the growth momentum. This kind of determinism is deeply disturbing but inexorable.

Related Topics
  • Coronavirus
  • Epidemic
  • Growth momentum
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