| THE AUSTRALIAN NATIONAL UNIVERSITY
Crawford School of Public Policy
CAMA
Centre for Applied Macroeconomic Analysis
The Global Macroeconomic Impacts of COVID-19:
Seven Scenarios
CAMA Working Paper 19/2020
February 2020
Warwick McKibbin
Australian National University
The Brookings Institution
Centre of Excellence in Population Ageing Research
Roshen Fernando
Australian National University
Centre of Excellence in Population Ageing Research (CEPAR)
Abstract
The outbreak of coronavirus named COVID-19 has disrupted the Chinese economy
and is spreading globally. The evolution of the disease and its economic impact is
highly uncertain which makes it difficult for policymakers to formulate an appropriate
macroeconomic policy response. In order to better understand possible economic
outcomes, this paper explores seven different scenarios of how COVID-19 might
evolve in the coming year using a modelling technique developed by Lee and McKibbin
(2003) and extended by McKibbin and Sidorenko (2006). It examines the impacts of
different scenarios on macroeconomic outcomes and financial markets in a global
hybrid DSGE/CGE general equilibrium model.
The scenarios in this paper demonstrate that even a contained outbreak could
significantly impact the global economy in the short run. These scenarios demonstrate
the scale of costs that might be avoided by greater investment in public health systems
in all economies but particularly in less developed economies where health care
systems are less developed and popultion density is high.
| THE AUSTRALIAN NATIONAL UNIVERSITY
Keywords
Pandemics, infectious diseases, risk, macroeconomics, DSGE, CGE, G-Cubed
JEL Classification
Address for correspondence:
(E) cama.admin@anu.edu.au
ISSN 2206-0332
The Centre for Applied Macroeconomic Analysis in the Crawford School of Public Policy has been
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1
The Global Macroeconomic Impacts of COVID-19:
Seven Scenarios
*
Warwick McKibbin
†
and Roshen Fernando
‡
29 February 2020
Abstract
The outbreak of coronavirus named COVID-19 has disrupted the Chinese economy and is
spreading globally. The evolution of the disease and its economic impact is highly uncertain
which makes it difficult for policymakers to formulate an appropriate macroeconomic policy
response. In order to better understand possible economic outcomes, this paper explores seven
different scenarios of how COVID-19 might evolve in the coming year using a modelling
technique developed by Lee and McKibbin (2003) and extended by McKibbin and Sidorenko
(2006). It examines the impacts of different scenarios on macroeconomic outcomes and
financial markets in a global hybrid DSGE/CGE general equilibrium model.
The scenarios in this paper demonstrate that even a contained outbreak could significantly
impact the global economy in the short run. These scenarios demonstrate the scale of costs that
might be avoided by greater investment in public health systems in all economies but
particularly in less developed economies where health care systems are less developed and
popultion density is high.
Keywords: Pandemics, infectious diseases, risk, macroeconomics, DSGE, CGE, G-Cubed
JEL Codes:
*
We gratefully acknowledge financial support from the Australia Research Council Centre of Excellence in
Population Ageing Research (CE170100005). We thank Renee Fry-McKibbin, Will Martin, Louise Shiner and
David Wessel for comment and Peter Wilcoxen and Larry Weifeng Liu for their research collaboration on the
G-Cubed model used in this paper. We also acknowledge the contributions to earlier research on modelling of
pandemics undertaken with Jong-Wha Lee and Alexandra Sidorenko.
†
Australian National University; the Brookings Institution; and Centre of Excellence in Population Ageing
Research (CEPAR)
‡
Australian National University and Centre of Excellence in Population Ageing Research (CEPAR)
2
1. Introduction
The COVID-19 outbreak (previously 2019-nCoV) was caused by the SARS-CoV-2 virus. This
outbreak was triggered in December 2019 in Wuhan city in Hubei province of China. COVID-
19 continues to spread across the world. Initially the epicenter of the outbreak was China with
reported cases either in China or being travelers from China. At the time of writing this paper,
at least four further epicenters have been identified: Iran, Italy, Japan and South Korea. Even
though the cases reported from China are expected to have peaked and are now falling (WHO
2020), cases reported from countries previously thought to be resilient to the outbreak, due to
stronger medical standards and practices, have recently increased. While some countries have
been able to effectively treat reported cases, it is uncertain where and when new cases will
emerge. Amidst the significant public health risk COVID-19 poses to the world, the World
Health Organization (WHO) has declared a public health emergency of international concern
to coordinate international responses to the disease. It is, however, currently debated whether
COVID-19 could potentially escalate to a global pandemic.
In a strongly connected and integrated world, the impacts of the disease beyond mortality (those
who die) and morbidity (those who are incapacitated or caring for the incapacitated and unable
to work for a period) has become apparent since the outbreak. Amidst the slowing down of the
Chinese economy with interruptions to production, the functioning of global supply chains has
been disrupted. Companies across the world, irrespective of size, dependent upon inputs from
China have started experiencing contractions in production. Transport being limited and even
restricted among countries has further slowed down global economic activities. Most
importantly, some panic among consumers and firms has distorted usual consumption patterns
and created market anomalies. Global financial markets have also been responsive to the
changes and global stock indices have plunged. Amidst the global turbulence, in an initial
assessment, the International Monetary Fund expects China to slow down by 0.4 percentage
points compared to its initial growth target to 5.6 percent, also slowing down global growth by
0.1 percentage points. This is likely to be revised in coming weeks
4
.
4
See OECD(2020) for an updated announcement
3
This paper attempts to quantify the potential global economic costs of COVID-19 under
different possible scenarios. The goal is to provide guidance to policy makers to the economic
benefits of globally-coordinated policy responses to tame the virus. The paper builds upon the
experience gained from evaluating the economics of SARS (Lee & McKibbin 2003) and
Pandemic Influenza (McKibbin & Sidorenko 2006). The paper first summarizes the existing
literature on the macroeconomic costs of diseases. Section 3 outlines the global macroeconomic
model (G-Cubed) used for the study, highlighting its strengths to assess the macroeconomics
of diseases. Section 4 describes how epidemiological information is adjusted to formulate a
series of economic shocks that are input into the global economic model. Section 5 discusses
the results of the seven scenarios simulated using the model. Section 6 concludes the paper
summarizing the main findings and discusses some policy implications.
2. Related Literature
Many studies have found that population health, as measured by life expectancy, infant and
child mortality and maternal mortality, is positively related to economic welfare and growth
(Pritchett and Summers, 1996; Bloom and Sachs, 1998; Bhargava and et al., 2001; Cuddington
et al., 1994; Cuddington and Hancock, 1994; Robalino et al., 2002a; Robalino et al., 2002b;
WHO Commission on Macroeconomics and Health, 2001; Haacker, 2004).
There are many channels through which an infectious disease outbreak influences the economy.
Direct and indirect economic costs of illness are often the subject of the health economics
studies on the burden of disease. The conventional approach uses information on deaths
(mortality) and illness that prevents work (morbidity) to estimate the loss of future income due
to death and disability. Losses of time and income by carers and direct expenditure on medical
care and supporting services are added to obtain the estimate of the economic costs associated
with the disease. This conventional approach underestimates the true economic costs of
infectious diseases of epidemic proportions which are highly transmissible and for which there
is no vaccine (e.g. HIV/AIDS, SARS and pandemic influenza). The experience from these
previous disease outbreaks provides valuable information on how to think about the
implications of COVID-19
The HIV/AIDS virus affects households, businesses and governments - through changed labor
supply decisions; efficiency of labor and household incomes; increased business costs and
foregone investment in staff training by firms; and increased public expenditure on health care
and support of disabled and children orphaned by AIDS, by the public sector (Haacker, 2004).
