Bank of America's estimate of global economic growth for 2020 quickly turned bleaker on account of the expanding COVID-19 outbreak, with the bank now forecasting 2.8% global GDP growth for the year.
It pointed out this is its first sub-3% reading since the Great Recession and financial crisis of 2008 that ended in mid-2009. Economists from the bank's Global Research unit expect world GDP, excluding China, to improve by only 2.2%, also the lowest since the Great Recession. They see China's GDP growth at only 5.2% in 2020 compared to 5.9% in 2019.
The trigger for this more pessimistic outlook is the COVID-19 outbreak, which has brought China's economy to a screeching halt since mid-January, and that now seems on the cusp of a widespread outbreak in the United States.
Adding to COVID-19's economic misery are "large spillover effects" crimping supply as a result of the still-raging U.S-China trade war launched by U.S. President Donald Trump in early 2018; persistent political uncertainty due to the November 3 presidential election in the U.S. and economic weakness in Japan and some regions of South America.
"Extended disruptions in China should hurt global supply chains," said BofA economist Aditya Bhave in a note to clients. "Weak tourist flows will be another headwind for Asia. And limited outbreaks, similar to the one in Italy, are possible in many countries, leading to more quarantines and weighing on confidence."
BofA neither sees the COVID-19 outbreak transforming into a global pandemic, nor does it see a global recession this year. Instead, it sees the disease-induced economic slowdown as part of a larger slowdown trend driven by a multitude of factors. These negative growth factors might be aggravated by the U.S. presidential election and continued effects from Trump's trade war against China.
"The upcoming Presidential elections add another layer of complexity, as US trade policy would probably change significantly under a Democratic President," said Bhave. "Business investment is likely to remain tepid until there is greater clarity on the rules of the game."
BofA's global GDP growth estimate for the year is more pessimistic than that of the International Monetary Fund (IMF). On February 22, the IMF estimated COVID-19 would likely cut only 0.1% from global growth in 2020. It also estimates COVID-19 will hit China the hardest, reducing the country's GDP growth in 2020 to 5.6%, which is 0.4% lower than the IMF's January prediction.
"But we are also looking at more dire scenarios where the spread of the virus continues for longer and more globally, and the growth consequences are more protracted," said IMF Managing Director Kristalina Georgieva at the G20 Finance Ministers and Central Bank Governors Meeting.
Georgieva said the IMF in January projected global growth strengthening to 3.3% in 2020 from 2.9% in 2019. Since this prediction was made, however, COVID-19 has kept disrupting business and economic activity in China, the factory of the world and the world's largest oil importer, and has spread faster in Europe and the Middle East.
Georgieva said the IMF's current baseline scenario hinges on China implementing announced policies, and if this does occur, China's economy might return to normal in the second quarter. As a result, the impact of COVID-19 on the world economy will be relatively minor and short-lived.
"In this scenario, 2020 growth for China would be 5.6%," said Georgieva. "This is 0.4 percentage points lower than the January WEO Update. Global growth would be about 0.1 percentage points lower."
Georgieva, however, admitted the IMF is also looking at more dire scenarios where the spread of COVID-19 continues far longer and is spread wider globally. If these scenarios come to pass, the growth consequences will be more protracted.
