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BIS Bulletin No 4: The Macroeconomic Spillover Effects of the Pandemic on the Global Economy

Core Content

This BIS Bulletin examines the macroeconomic spillover effects of the pandemic on the global economy, using a global Bayesian Vector Autoregression (BVAR) model to simulate the economic consequences of the virus and associated confinement measures across five major economic blocs: the United States, China, the euro area, "other advanced economies" (OAE), and "other emerging market economies" (OEM).

Main Points

• Pandemic Impact: The spread of the coronavirus (Covid-19) represents an unprecedented shock to the global economy, with confinement measures significantly reducing economic activity.
• Model Overview: The BVAR model captures the interactions between these blocs, including spillovers and spillbacks, based on historical data from 1997 to 2019.
• Scenarios Considered: Four scenarios are simulated to assess the impact of the pandemic, considering both the size and timing of the initial shock:
  • Less Severe Scenario: GDP drops by 2.5% initially.
  • More Severe Scenario: GDP drops by 5% initially.
  • V-type Shock: A single wave of confinement, with the shock distributed across Q1 and Q2.
  • W-type Shock: A double wave of confinement, with a second wave occurring two quarters later and having a smaller impact.

Key Findings

• Persistence of Effects: The total GDP shortfall is likely to be twice the initial impact due to the persistence of economic activity reductions.
• Spillover Effects: Economic spillovers and spillbacks are significant. Even if the virus is controlled in one or two regions, the economic effects are not confined to those areas.
• Multiplier Effects: The model highlights the compounding effect of the initial drop in economic activity through spillover channels, leading to prolonged output losses.
• Regional Differences: The euro area experiences larger spillovers from emerging market economies (EMEs) due to its higher reliance on exports, compared to the United States.
• Importance of Global Coordination: The results emphasize that domestic mitigation alone is insufficient. International cooperation in macroeconomic policies is essential to address the global nature of the pandemic's economic impact.

Implications

• Unilateral Policies Fail: Unilateral macroeconomic policies are unlikely to be effective in mitigating the economic consequences of a pandemic.
• Need for Global Cooperation: Countries must consider the global implications of their confinement, border control, and macroeconomic policies to avoid repeated economic shocks.
• Model Limitations: While the model provides useful insights, it may underestimate the economic effects due to factors like hysteresis in labor markets, changes in consumption patterns, and disruptions to global value chains.

Conclusion

The simulations underscore the significant economic spillovers and spillbacks from pandemic-type recessions. The global economy is highly interconnected, and the economic consequences of the pandemic are not limited to the regions directly affected. International coordination is crucial to design effective policies that limit the spread of the virus and mitigate its economic impact.

References

• Ferguson, N et al (2020): "Impact of non-pharmaceutical interventions (NPIs) to reduce Covid-19 mortality and healthcare demand", Imperial College COVID Response Team Report 9, 16 March.
• INSEE (2020): "Point de conjuncture du 26 mars 2020", press release, 26 March.
• OECD (2020): "Evaluating the initial impact of Covid containment measures on activity", 27 March.

Previous Issues

• No 3: Covid-19, cash, and the future of payments by Raphael Auer, Giulio Cornelli and Jon Frost
• No 2: Leverage and margin spirals in fixed income markets during the Covid-19 crisis by Andreas Schrimpf, Hyun Song Shin and Vladyslav Sushko
• No 1: Dollar funding costs during the Covid-19 crisis through the lens of the FX swap market by Stefan Avdjiev, Egemen Eren and Patrick McGuire

All issues are available on the BIS website: www.bis.org