The COVID‐19 Pandemic and Its Impact on the Global Economy: What Does It Take to Turn Crisis into Opportunity?

• Published date: 01 July 2020
• Date: 01 July 2020
• Author: Yixiao Zhou,Ligang Song
• DOI: http://doi.org/10.1111/cwe.12349

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 1–25, Vol. 28, No. 4, 2020 1

*Ligang Song, Professor, Arndt-Corden Department of Economics, Crawford School of Public Policy, Australian

National University, Australia. Email: ligang.song@anu.edu.au; Yixiao Zhou, Senior Lecturer, Arndt-Corden

Department of Economics, Crawford School of Public Policy, Australian National University, Australia. Email:

yixiao.zhou@anu.edu.au.

The COVID-19 Pandemic and Its Impact on the

Global Economy: What Does It Take to

Turn Crisis into Opportunity?

Ligang Song, Yixiao Zhou*

Abstract

The COVID-19 pandemic broke out at a time when there were heightened uncertainties

in the global economy. Understanding these uncertainties provides an important

background for analyzing the impact of the pandemic on the global economy, assessing

the effectiveness of policy measures in combating the pandemic and reviving the global

economy, and predicting the trajectory of the economic recovery in the post-pandemic

era. We analyze how COVID-19 would likely deepen an existing malaise in the global

economy, and what could be done to address these problems while managing the economic

recovery. We argue that three fundamental factors that could lead to a solid recovery in the

post pandemic era are structural reform, new technology and re-integration. They could

be managed by instituting a new “global social contract.” Supported by strong public

policies at all levels, especially at national level, these three factors could bring about the

salvation of the global economy as it recovers or re-emerges from the pandemic crisis.

Key words: COVID-19, economic recovery, global recession, global social contract

JEL codes: F01, F50, I18

I. Introduction

On 31 December 2019, Wuhan Municipal Health Commission of China reported a

cluster of cases of pneumonia in Wuhan, Hubei Province. A novel coronavirus was

eventually identied. On 11 March 2020, the World Health Organization (WHO) made

the assessment that COVID-19 could be characterized as a pandemic (WHO, 2020). The

pandemic hit Europe and Americas hardest, measured by the number of conrmed cases

(Figure 1).

Ligang Song, Yixiao Zhou / 1–25, Vol. 28, No. 4, 2020

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

2

Figure 1. The Evolution of the COVID-19 Pandemic in Number of Conrmed Cases (by WHO Region),

January–June 2020

Source: Authors’ construction based on data from the World Health Organization (WHO).

The health crisis not only caused a tragically large number of human lives to be lost,

but also dealt a heavy blow to market condence and economic activity. The magnitude

and speed of contraction in economic activity that followed was unlike anything

experienced in our lifetime. Rising fears and a global economic shutdown caused nancial

markets to seize up and plummet. Globally, stock markets crashed from their record highs

and reported their largest one-week declines since the 2008 global nancial crisis (GFC).

Oil prices in the US turned negative for the rst time on record after oil producers ran out

of space to store the oversupply of crude left by the coronavirus crisis and after the failure

of negotiations between Saudi Arabia and Russia to try to curtail production, triggering

an historic market collapse, which left oil traders reeling. The price of US crude oil

crashed from US$18 a barrel to –US$38 in a matter of hours, as rising stockpiles of crude

threatened to overwhelm storage facilities and forced oil producers to pay buyers to take

the barrels they could not store. The market crash underlined the impact of the coronavirus

outbreak on oil demand as the global economy slumped (Figure 2).

The International Monetary Fund (IMF) called the economic crisis sparked by

COVID-19 the Great Lockdown and projected that global growth in 2020 would fall to

–3 percent, on the assumption that the pandemic and the required containment peaks in

the second quarter for most countries in the world and would recede in the second half of

this year. It is a downgrade of 6.3 percentage points from January 2020, a major revision

over a very short period. It makes the Great Lockdown the worst recession since the Great