Publication 01 May 2020 - Alternative scenarios for the impact of the COVID-19 pandemic on economic activity in the euro area - Prepared by Niccolò Battistini and Grigor Stoevsky
The outbreak of the COVID-19 pandemic has dramatically affected global economic activity since early 2020. The rapid spread of the novel coronavirus (COVID-19) has required drastic measures to be taken, ranging from social distancing and the banning of public events to shutdowns, lockdowns and restrictions on numerous activities.
The severity of these measures has begun to ease in some jurisdictions, as authorities are proceeding to gradually lift them and reopen certain sectors of the economies. Nevertheless, there could still be a prolonged period of social distancing and other containment measures in force for some time. These containment measures have weighed on supply and – together with increased uncertainty and self-isolation by individuals due to the rapid spread of the disease – have also induced households and firms to retrench their spending, thereby reducing aggregate demand. Widespread closures of firms have triggered a marked deterioration in employment conditions, an increase in firms’ liquidity needs, and pronounced financial market disruptions. Despite the shortage of timely hard data, it is already clear that there has been a decline in economic activity of an unprecedented magnitude.
The high uncertainty surrounding the economic impact of the COVID-19 pandemic warrants an analysis based on alternative scenarios. There are high uncertainties surrounding the developments of the pandemic, the need for and effectiveness of containment measures, and the possible emergence of medical treatments and solutions. These uncertainties can be illustrated through a scenario analysis, based on broad narratives for the aforementioned factors and their economic impact. It should be noted that these are illustrative scenarios compiled by ECB staff and, as such, they should not be seen as an indication of the forthcoming June 2020 Eurosystem staff macroeconomic projections for the euro area and thus they do not pre-empt in any way that projection exercise. Moreover, this box focuses only on economic activity, while the forthcoming June 2020 Eurosystem staff macroeconomic projections will be a fully-fledged projection exercise, including a detailed assessment of the inflation outlook.
This box presents three alternative scenarios to illustrate the range of likely impacts of the COVID-19 pandemic on the euro area economy. The scenarios vary according to a number of factors, namely the duration of the strict lockdown measures and their impact on sectoral economic activity, the economic effects of protracted containment measures during a post-lockdown transition period, the behavioural responses by economic agents to minimise economic disruptions, and the longer-lasting effects for economic activity once all containment measures have been lifted. This scenario analysis for the euro area is based on the same broad narratives for the global economy (and thus for the euro area foreign demand), while it abstracts from further feedback loops related to financial market disruptions or long-term implications of persistently high unemployment.
The different assumptions underlying the three illustrative alternative scenarios imply a range spanning from mild to severe expected economic impact. In the first (mild) scenario, strict lockdown and further containment measures, as well as rapid advances in medical treatments, entail relatively short-lived strict lockdown periods (ending in the course of May 2020), a gradual return to normal activity thereafter and only temporary economic losses. In the second (medium) scenario, a short-lived strict lockdown period (also ending in the course of May 2020) is followed by relatively stringent and protracted containment measures, implying a delayed return to normal activity, as well as persistent output losses. In the third (severe) scenario, a longer-term strict lockdown period (ending in the course of June 2020) has only limited success in containing the spread of the virus, thus requiring ongoing tough containment measures to remain in place even after some loosening of the very strict lockdowns. The sustained efforts to prevent the spread of the virus would continue to significantly dampen activity across sectors of the economy until a vaccine (or another effective medical solution) were to become available. This is not expected to occur until around mid-2021. Therefore, this scenario envisages significant and permanent output losses.
Containment measures during the lockdown periods have a diverse impact across economic sectors in the euro area. The collapse in activity is initially the strongest for services, particularly those related to travel and recreational activities. This has already been indicated by some of the available survey evidence. However, the lockdown measures and the ensuing supply bottlenecks reduce production dramatically, also across large segments of the industry. Overall, the containment measures are assumed to cause a relatively larger loss of value added in retail trade, transport, accommodation and food service activities compared to manufacturing, construction and other sectors (see Table A). The sectoral breakdown is indicative and based on anecdotal evidence and available survey evidence. It helped derive economy-wide estimates for the likely economic losses, which are broadly in line with available estimates from other institutions. The total initial economic loss implied during the lockdown is estimated to amount to around 30% – depending on the country – of value added relative to the normal level of activity. On account of agents’ responses aimed at minimising economic disruptions, the total initial economic losses are assumed to decline in the course of the second quarter of 2020. Under the assumptions used for these illustrative scenarios, the marginal impact of an additional month of lockdown measures on the annual GDP level is initially, approximately, between 2 and 2½ percent.
Copyright: European Central Bank
Directorate General Communications
Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany
Tel.: +49 69 1344 7455, E-mail: media@ecb.europa.eu
Website: www.ecb.europa.eu
page source https://www.ecb.europa.eu/
