The grave risks and dangers of a globalized world of interlocking supply chains over the last four decades is starting to be realized as the crash of China's economy could cost the world $2.7 trillion.
Bloomberg Economics says the shutdown of China's economy could have severe implications for the rest of the world and lays out four scenarios of what could happen next:
The first scenario is a plunge in China's economy, with a modest spillover of economic damage in Asia Pacific countries, Europe, and the US. China is a source of demand for multinationals based across the world, and if China can reopen its economy as soon as possible, contagion can be minimized. The scenario says a "severe shock in the first half would be followed by recovery in the second. For the world as a whole, and major economies like the US, the impact would then be hard to see in the full-year GDP data."
The second scenario is the assumption that the Covid-19 outbreak worsens, and China's economy remains disrupted with the hopes of a V-shape recovery transforming into a U-Shape dip, which would result in localized disruptions for Asia Pacific countries and Europe.
"Even when factories are back to work, it's not like all the problems are solved," said Li Lei, the Made-in-China.com manager. "Many factories don't have enough inventory… the supply chain obstacles cap production capacity."
The scenario assumes Asia Pacific countries like South Korea and Japan, and European countries like Germany, France, and Italy, would experience supply chain disruptions because of the lack of parts sourced from China due to factory shutdowns. Bloomberg said in their calculations, this scenario would result in global growth at 2.3%, down from 3.1% pre-virus forecast.
The third scenario is a widespread breakout of the virus in South Korea, Italy, Japan, France, and Germany.
"In scenario three, we layer on a more severe shock to South Korea, Italy, Japan, France, and Germany. And we add a smaller shock to all the countries that had reported any cases as of the start of March. That includes the U.S., India, the U.K., Canada, and Brazil—meaning that all of the world's 10 biggest economies suffer a slowdown as they fight to contain the domestic spread of the virus," Bloomberg said.
The scenario says global growth would slide to 1.2% for the year, Europe and Japan would plunge into a recession, and the US economy would expand by .5% with a reversal in the unemployment level by the end of the year.
The fourth scenario is a "global pandemic." Bloomberg says in this model virus cases and deaths soar across all major economies and causes one of the most massive economic shocks the world has seen since the 2008 financial crisis. In this event, global growth plunges to zero; the US, Europe, and Japan dive into recession, which would trigger a massive $2.7 trillion hit in global output.
Last month Michael Every of Rabobank laid out his four scenarios for the virus' economic and market impact: "The Bad," "The Worse," "The Ugly," and "The Unthinkable."
In an updated post on March 4, Every said, "It's Getting 'The Ugly,'" as this scenario foresees "the US, UK, and Europe were infected too. Naturally, this implied a deep global recession."
And it appears the world is just one step away from "The Unthinkable," which Every describes this scenario as a global pandemic that has only been seen in Hollywood movies.