World economy may shrink because of virus, watchdog says

A woman wearing a protective face mask talks on her phone at the Central Business District in Beijing, Monday, March 2, 2020. China's manufacturing plunged in February as anti-virus controls shut down much of the world's second-largest economy, but companies are confident activity will revive following government stimulus efforts, according to two surveys. (AP Photo/Andy Wong)

PARIS (AP) — A global agency says the spreading new virus could make the world economy shrink this quarter for the first time since the international financial crisis more than a decade ago.

In a special report on the impact of the virus, the Organization for Economic Cooperation and Development said Monday that the world economy is still expected to grow overall this year and rebound next year.

But the OECD lowered its forecasts for global growth in 2020 by half a percentage point, to 2.4% — and said the figure could go as low as 1.5% if the virus lasts long and spreads widely.

In addition to the “considerable human suffering” the virus has wrought, with more than 3,000 deaths worldwide, the OECD said ”“Global economic prospects remain subdued and very uncertain.”

The last time the world economy shrank on a quarter-on-quarter basis was at the end of 2008, when a shock to the financial sector caused turmoil for businesses around the world and mass layoffs. On a full-year basis, it last shrank in 2009.

The OECD said China’s reduced production is hitting Asia particularly hard but also companies around the world that depend on its goods.

It urged governments to act fast to prevent contagion and restore consumer confidence.

The Paris-based OECD, which advises developed economies on policy, said the impact of this virus is much higher than past outbreaks because “the global economy has become substantially more interconnected, and China plays a far greater role in global output, trade, tourism and commodity markets.”

China’s viral outbreak has already disrupted global supply chains and cut business profits. And as the disease spreads, economists now worry about a graver scenario: That quarantines and greater caution among consumers will lead people to cancel travel plans, skip restaurant meals, avoid stores or stay home from work.

Already the European Union’s markets commissioner, Thierry Breton, estimated Monday that the virus has cost Europe 2 billion euros ($2.2 billion) this year in tourism revenue alone, mainly because of the drop in number of Chinese tourists. Things are expected to get worse for Europe with the eruption of cases in northern Italy and the cancellation of events like the Venice Carnival.

Investors seem to expect central banks to come to the rescue by cutting interest rates, particularly in the U.S. But experts not that lower rates cannot fix the problem.

Lower rates can lead people and businesses to borrow and spend, which can boost economic activity. But they can’t make sick people healthy, reopen factories whose workers are kept home because of quarantines or restart supply chains in areas of the world struck by the outbreak.