The coronavirus is dominating the news and sparking panic in markets. We believe the options for policymakers are clear—but will they implement them?

In little more than a week, the coronavirus has been transformed from a largely Asian affair into a clear and present danger for the whole of the global economy. Sadly, the disease is exacting a growing human toll, and its spread has sparked record gyrations in global equity markets, pushed bond yields to new lows and prompted the US Federal Reserve (the Fed) into its first emergency rate cut since the global financial crisis (GFC). So how much of a threat is the coronavirus to the global economy and what can policymakers do about it?

Gauging the Threat from Coronavirus

Much about the coronavirus remains uncertain so we should exercise greater than normal caution when trying to gauge its impact on the global economy. Not only do we have limited visibility on the path of the virus itself, but the list of comparable historical examples to use as a playbook is short.

What we do know is that the global economy remains fragile, overshadowed as it is by rising populism and increased geopolitical tension between China and the West. We also know that many parts of the developed world are approaching the limits of monetary-policy effectiveness, and that a combination of these factors makes the global economy unusually vulnerable to negative shocks like the coronavirus.

The Economic Implications of Containment Measures

Until a week or so ago, the main channels through which the coronavirus was expected to affect the global economy were the direct hit to Chinese growth and supply-chain disruption elsewhere. The former has certainly been impressive, with February’s purchasing managers’ indices falling even more precipitously than during the GFC. But with the Chinese authorities expected to respond with aggressive policy stimulus, the overall damage to the global economy from these two channels was expected to be manageable, requiring only a modest downgrade to growth expectations.

Now, with the virus advancing outside China, this relatively sanguine view of the world is rapidly being overtaken. The key risk is that governments’ measures to contain the virus in the large developed economies will catapult the world into a deep recession. It’s still too early to draw firm conclusions, of course, but there are ominous signs. In Europe, for example, the focus is starting to shift to delaying the spread of the virus rather than trying to prevent or contain it. Indeed, it seems only a matter of time before governments start to impose onerous restrictions on various forms of economic activity.