G20 Ministerial: Identifying Risks but Light on Responses

February 25, 2020

Finance ministers and central bank governors from the world’s largest economies met over the weekend of February 22-23 in Riyadh, Saudi Arabia, against a backdrop of rising concerns about the extent and impact of the coronavirus (COVID-19) outbreak on the global economy. Notwithstanding reports that the economic fallout from the virus was central to discussions, the “Group of Twenty” (G20) communique merely highlighted the potential downside risks stemming from the COVID-19 outbreak. Ministers’ general commitment to “safeguard against downside risks” suggested little in the way of specific triggers for coordinated action, reflecting the unknown extent and trajectory of the outbreak and its economic impacts. With record low interest rates and high debt burdens characterizing many of the world’s economies, the lack of specific action may also reflect countries’ limited capacities to react with traditional stimulus.

Q1: How did the communique characterize the economic outlook and the impact of COVID-19 on the global economy?

A1: The first line of the communique noted finance ministers’ and central bank governors’ expectation that global economic growth would increase modestly in 2020 as compared with last year’s 2.9 percent growth, the slowest rate of expansion since the global financial crisis. While it acknowledged downside risks to the outlook stemming from “geopolitical and remaining trade tensions, and policy uncertainty,” COVID-19 was described in the context of a monitoring risk, with no mention of specific action to address such risks.

The communique’s single mention of COVID-19 contrasted with press reports that “The economic fallout all but seized center stage at the meeting.” It also diverged from the stand-alone statement by the International Monetary Fund (IMF)’s Managing Director Kristalina Georgieva, who, on February 22, acknowledged the difficulty in forecasting the economic impact given the uncertainties regarding the virus’s spread and prospects for containment. The IMF’s current baseline scenario calls for the Chinese economy to “return to normal in the second quarter” with only “minor and short-lived” impacts on the global economy. Under the IMF’s baseline, global growth would be 0.1 percentage point lower than in the IMF’s January forecast, at 3.2 percent for 2020. However, the IMF also acknowledged “more dire scenarios,” with more protracted growth consequences, an outcome which may be unfolding with reports over the weekend of a spike in cases outside China, notably in two other G20 economies, Italy and South Korea.

Q2: How does the assessment from Riyadh compare with more recent developments?

A2: The communique’s language and the IMF’s modest downward revision to global growth contrast with indications the virus has not yet reached an inflection point. Inside China, most baseline scenarios called for the outbreak to be largely contained by March; the median forecast consistent with such a scenario estimates Chinese growth will slow to 5.5 percent in 2020, broadly in line with the IMF’s revised forecast of 5.6 percent. Meanwhile, the February 21 Politburo meeting calling for additional stimulus has been interpreted as a sign of growing concern within China over the outbreak’s economic impact, while China’s President Xi reportedly stated that China should meet its annual growth target, thought to be around 6 percent for 2020. A delayed containment scenario would lead to more serious supply chain disruptions and possibly more lasting effects on the Chinese economy to the extent such disruptions are used to justify more permanent changes in supply chains and diversification away from China.

While the number of cases has nearly doubled in mainland China over the past two weeks, cases outside the mainland experienced a more than six-fold increase, from 378 to 2,394 as of February 24, representing 3 percent of total cases worldwide. South Korea reported a total of 833 cases, the largest concentration outside mainland China; while Italy, with 230 cases, now has the most infections outside Asia. Even before the spike in Korean and Italian cases, the estimated 0.1 percentage point impact on the global economy in 2020 was at the low-end of analyst projections. An expanded outbreak, combined with more aggressive measures to contain the spread outside China, is likely to increase the hit to the global economy.

U.S. officials have been reluctant to quantify the impact on the U.S. economy. In Riyadh, Treasury Secretary Mnuchin indicated the economic impact of the virus would be clearer in the coming weeks; while private analysts have already started revising U.S. growth lower: S&P reduced its first quarter estimate for GDP growth from 2.2 to 1 percent (y/y); Goldman Sachs lowered its first quarter estimate by 0.4 percentage points; and BNP Paribas lowered its estimate for 2020 GDP growth from 1.8 to 1.6 percent. Despite earlier optimism, financial markets are pricing-in the more negative outlook, with global equity markets almost uniformly down and the Dow Jones Industrial losing more than a thousand points (3.6 percent) on February 24 alone.

Q3: What can policymakers do should “more dire scenarios” come to fruition?

A3: Policymakers typically respond to an economic slowdown by adopting more accommodative policies, making credit and fiscal conditions looser to support economic activity. However, the effectiveness of an economic stimulus may be constrained under the current scenario. First, a stimulus may prove less effective with economic actors, such as workers and consumers, effectively side-lined as a result of containment measures. Second, economic policy is already quite accommodative in many parts of the world, including in the United States, where monetary and fiscal policies have already been supportive despite the generally benign backdrop.

Last week, the Federal Reserve’s Vice Chairman Richard Clarida acknowledged the impact of COVID-19 on the Chinese economy but noted continued strong fundamentals in the United States, suggesting a rate cut in the United States was not expected. Given already low rates, some analysts view further rate cuts as “ ‘ineffective if not counterproductive’ in combating current issues.” Secretary Mnuchin confirmed in Riyadh that the United States has a backup plan in terms of a fiscal response to the virus outbreak. On February 24, the White House requested an appropriation of $1.25 billion to support critical response and preparedness activities. For now, the most important response may be to ensure the smooth functioning of global financial markets in the event global economic conditions deteriorate further.

Stephanie Segal is a senior fellow with the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C. Stephen Dwyer, Simon Chair research intern, contributed to this Critical Questions piece.

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