JEUDI 12 MARS 2020 BIZWEEK ÉDITION 281 SPECIAL SERIES ON THE RESPONSE TO THE CORONAVIRUS Limiting the Economic Fallout of the Coronavirus with Large Targeted Policies The human costs of the coronavirus outbreak have risen at an alarming rate and the disease is spreading across more countries. The first priority is clearly to keep people as healthy and safe as possible. Countries can help by spending more to boost their health systems, including on personal protective equipment, screening, diagnostic tests, and additional hospital beds. Without a vaccine to stop the virus, countries have taken measures to limit its spread, like travel restrictions, temporary school closures, and quarantines. Such measures also buy valuable time to avoid overwhelming health systems. Economic fallout COVID-19's impact on China% economy Manufacturing and services activity have declined dramatically. Services appears to be much harder nit/han manufacturing. (Manufacturing rurchasing Managers'Index, seasonally adjusted, 50+= evpansion) 54 52 50 48 46 44 42 40 38 36. -1 2 GFC 111N1 Last year COVID-19 (Services Rirchasing Managers'Index, seasonahly adjusted, 501- = expansion) 60 55 50 45 40 35. 30 25 -1 2 GFC H1N1 Last year COVID-19 Sources.- Haver Analirlics ; and IMF staff calculations. Note  : The x-axis shows the months elapsed sine the indicated event, with t=0 the initial impact monttr. Specific start dates by event are  : COVID-19 = Coronevirus Disease 2019 (January, 2020), FI1N1 = Influenza A virus suhrtype H1 N1 (April, 2009), GFC = Global Financial Crisis (Septern ber, 2008), and I ast year = January 2019. INTERNATIONAL MON ETARY FUND POST SCRIPTUM This health crisis will have a significant economic fallout, reflecting shocks to supply and demand different from past crises. Substantial targeted policies are needed to support the economy through the epidemic, keeping intact the web of economic and financial relationships between workers and businesses, lenders and borrowers, and suppliers and end-users for activity to recover once the outbreak fades. The goal is to prevent a temporary crisis from permanently harming people and firms through job losses and bankruptcies The economic impact is already visible in the countries most affected by the outbreak. For example, in China, manufacturing and service sector activity declined dramatically in February. While the drop in manufacturing is comparable to the start of the global financial crisis, the decline in services appears larger this time—reflecting the large impact of social distancing. The global supply and demand for dry bulk shipping stocks such as building materials and commodities has also dropped similar to during the most acute phase of the global financial crisis, reflecting curtailed economic activity associated with the unprecedented containment effort. This drop was not seen in recent epidemics or after the 9/11 attacks. Shipping costs The shipping index shows a sharp drop in vessel leasing rates since the start of the COVID-19 outbreak. (Salut Dry Index, one month prier to start date = 1 ao) eci 1 te 130 100 40 —9/11 —SARI —GFC —H141 —CNO-19 Sources Haver Analylics, and IMF staff calculaiions. 0 Allah Note  : The x-axis shows the months elapsed snce the indicated event, with t=0 the initial impact mont Underlymg data are at d aily frequency. Specif c start dates by event are  : COVID-19 = Coronavirus Disease 2019 (January 11, 2020), H1N1 = Influenza A vl rus subtype I-11N1 (April 15, 2009), GFC = Global Finam al Crisis (Septernber 15, 2008), SARS = Severe acute respiratory syndrome (November 16, 2002), and 9/11= (September 11, 2001). INTERNATIONAL MONETARY FUND Supply and demand shocks 2 3 The coronavirus epidemic involves both supply and demand shocks. Business disruptions have lowered production, creating shocks to supply. And consumers’and businesses’reluctance to spend has lowered demand. On the supply side, there is a direct reduction in the supply of labour from unwell workers, from caregivers who have to take care of kids because of school closures, and sadly, from increased mortality. But an even larger effect on economic activity occurs because of efforts to contain the spread of the disease through lockdowns and quarantines, which lead to a drop in capacity utilization. In addition, firms that rely on supply chains may be unable to get the parts they need, whether domestically or internationally. For example, China is an important supplier of intermediate goods to the rest of the world, particularly in electronics, automobiles, and machinery and equipment. The disruption there is already having knock-on effects to downstream firms. Together, these disruptions contribute to a rise in business costs and constitute a negative productivity shock, reducing economic activity. Key link in global value chains China is a major supplier of intermediate goods to the rest of the world. (imports of intermediate gonds from China inrnanufacturing, percent of value addec) 16 12 a 11111111111 e\ca e ci'