Analysts at Swiss Re have argued that, in addition to cushioning the impact of COVID-19, governments need to look beyond the outbreak for new drivers of sustainable growth, such as renewed spending on infrastructure.
The reinsurer has revised down its foreast for 2020 global growth to -3.8%, from -1.2% previously in response to the development of the pandemic.
It estimates that the cost of COVID-19 will be roughly -6.4% of global GDP this year, with countries in the west most affected.
Comparing the crisis to the 1918 Spanish Flu outbreak, Swiss Re believes that the recovery from COVID-19 will prove more challenging.
For example, in 1918, government spending on war efforts more than made up for the drop in consumption and private investments, whereas today the supply side of the economy is impacted by strict lockdown and government demand will not provide similar support.
Additionally, the manufacturing sector was a large driver of the economy a century ago, while in 2020 the services sector plays a much more important role, and foregone spending on services will not be recouped.
Swiss Re notes that when COVID-19 first emerged in China, western countries were initially concerned by the impact of disruption to global supply chains.
But as the virus quickly spread across the world, these economies came face-to -face with rising healthcare costs, as well as costs from the stringent containment measures.
Swiss Re’s quarterly growth profile expectation also back the findings of a study that investigated the impact of state interventions in the US during the Spanish Flu.
The study found that cities that responded swiftly and aggressively experienced a relative increase in manufacturing employment and output, and a rise in bank assets at the end of the outbreak.
Today, Swiss Re believes that China will return to an expansionary trend following one quarter of negative growth in the first quarter, while the US and the euro area will see two subsequent quarters of negative growth.
For the full year, analysts expect the US and euro area economic activity to contract by 6.4% and 7.5%, respectively. In contrast, full-year growth in China is forecast at 3.2%, albeit at a lower rate relative to its historical growth path.
