The rich and the poor, the young and the old, coronavirus is affecting us all irrespective of ethnicity, nationality or social status – albeit to varying degrees.

The world economy has caught the cold too. As governments across the globe go into lockdown mode to arrest the spread of the Covid-19, the engines of economic growth are grinding to a halt. For some time anyway. 

It’s a no-brainer that the pandemic’s fallout will go beyond the health crisis. The capital markets have already crashed. Government and monetary authorities from Europe to Australia have moved to support their economies in these trying times. Several stimulus packages have been rolled out. More are expected as the toll rises.

What does all this mean for global economy? Certainty eludes us, with a lot depending on how the virus behaves in the next few weeks and how soon it runs its course. However, based on current circumstances, some challenges can be expected - high export losses, a looming ‘seclusion crisis’, and in the worst case, a global recession, according to Allianz economists. 

From Italy to the U.S. to India, countries have clamped down on the movement of people and most goods to halt the spread of the Covid-19.

To study the possible impact of the lockdowns, Allianz economists reviewed the January-February data from China, which was the first to be affected by the pathogen. The data showed that a month of confinement triggered a decline of 13 percent in consumer spending, a 20 percent slump in investment and a 16 percent dip in exports.

This suggests that each month of lockdown could cause a fall of 7-10 percent in the real gross domestic product (GDP), which is the economic output adjusted for inflation. Assuming that the lockdown is over by the end of April and normal activity resumes by June-end – half of the monthly losses are restored in May and 80-90 percent in June – the trough could be reached in the second quarter.

If governments succeed in bringing the contagion under control, economic activity could rebound in the second half. In this U-shaped recovery scenario, where normal levels are restored shortly after a slump, a severe recession would characterize the first half of 2020. Global growth could be 0.8 percent for the year, with the U.S. growing at 0.5 percent but the Eurozone seeing a contraction of 1.8 percent in its economic output.

Do remember that 2020 has more market shakers ahead – the upcoming U.S. elections, the sequel of Brexit, and a complex mix of high taxes and high inflation as the public sector tries to regain its financial strength after a series of stimulus measures. 

While unlikely, it’s not impossible that the Covid-19 saga draws out for the next one year or longer. Borders stay close and countries are forced to jump in and out of lockdowns over an extended period.

If these fears do come true, recovery would be L-shaped, meaning the economy will take a long time to return to its pre-coronavirus growth. Then, the Eurozone’s GDP could contract by a sharp 4 percent or even more. 

The pessimism prevalent in the business world is reflected in the Purchasing Managers' Index (PMI), an indicator of whether supply chain managers expect the manufacturing and service sectors to expand, contract or stay unchanged.

For the Eurozone, the composite PMI – a barometer of the economic health of both the manufacturing and service sectors - dropped to an all-time low of 31.4 points in March. A reading of above 50 indicates an economic expansion, while a reading under 50 indicates contraction. 

The services sector seems especially vulnerable, with the services PMI plunging 24 points to 28.4. Record declines in new orders and expectations of future output, as well as the sharpest decline in employment since July 2009, suggest that there will clearly be more pain ahead.

Every crisis has shaped behaviors in one way or another. The coronavirus chaos won’t be an exception. Allianz researchers throw five ideas into the ring:

Health system investments: After years of being on the backburner, health systems will be back in the spotlight as the virus emphasizes the need for stronger public healthcare systems.

China’s importance: The Asian giant was the first to be affected by the coronavirus. Ravaged by the virus, the country is not only rebooting but also offering support and expertise to other epicenters. The event reinforces China’s importance in the global economy.

Localization over globalization: Countries turned inwards when the virus spread and the sudden supply chain shock left many companies smarting. Businesses may be tempted to look closer home for their needs as they try to minimize the chances of such shocks in the future.

Dealing with other challenges: The crisis could change the way we fight other challenges such as climate change, another exponential, probabilistic and collective challenge ahead of us.

Investment patterns could change: Few would doubt that the outbreak will change how we work, how we shop and how we travel. What could also change, is how we invest...or not. That could even inspire the creation of new financial products. 

For a more in-depth look into what can be expected from the global economy in the coming months, read the Covid-19: Quarantined Economics report from Allianz Research...