Congressional Research Service IN11235 (COVID-19: Potential Economic Effects)

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A Congressional Research Service Insight, IN11235, dated March 11, 2020, discussing the potential economic effects of the coronavirus (COVID-19) on the U.S. economy. It states that the outbreak will directly affect foreign demand for U.S. exports and could disrupt U.S. companies' international supply chains, and that if COVID-19 becomes widespread in the United States it could reduce domestic economic activity on both the supply and demand sides. It describes reduced hours worked from illness and work stoppages, reduced spending from quarantines and event cancellations, and lower business, consumer and investor confidence, citing the sharp decline in the stock market since late February 2020.

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INSIGHTi

COVID-19: Potential Economic Effects

March 11, 2020
This Insight discusses the potential economic effects of the coronavirus (COVID-19) on the U.S.
economy. For background on the coronavirus, see CRS In Focus IF11421, COVID-19: Global
Implications and Responses, by Sara M. Tharakan et al.

Channels Through Which the Virus Could Affect the
Economy
Although the COVID-19 outbreak presently is most widespread abroad, it will directly affect foreign
demand for U.S. exports of goods and services. As discussed in this CRS In Focus, the coronavirus could
also disrupt U.S. companies’ international supply chains. If COVID-19 becomes widespread in the United
States, it could directly reduce domestic economic activity by reducing both supply and demand. On the
supply side, hours worked would be reduced by illnesses and fatalities and any work stoppages to prevent
the virus from spreading. On the demand side, spending could be reduced by quarantines and other
attempts to avoid crowds, such as public event cancellations. In addition, fear and uncertainty could
reduce business and consumer confidence, leading to a reduction in spending. A reduction in investor
confidence could also tighten financial conditions. For example, the sharp decline in the stock market
since late February 2020 was widely perceived to be in response to worsening news about the virus. In
general, these macroeconomic effects would be expected to eventually reverse once conditions return to
normal, except to the extent COVID-19 causes worker fatalities.

Unknowns in Evaluating the Economic Impact
How large could the economic effects of the coronavirus ultimately be? At this stage, uncertainty is so
great that a very wide range of economic outcomes—from little effect on the U.S. economy to a severe
downturn—is plausible. The unknowns include the following questions:
 How many people will become infected over the course of the outbreak in the United
States and abroad?
 How long will the outbreak last?

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IN11235

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 What public and private measures will ultimately be taken that disrupt normal economic
activity (e.g., travel restrictions, closures, shutdowns, cancellations)?
 How easily can businesses find substitutes for supply chain disruptions?
 How many businesses will fail before the outbreak ends?
 How will consumer and investor confidence be affected?
 What fiscal or monetary policy actions will ultimately be taken to offset the economic
effects, and how effective would they be in a pandemic? To date, an emergency
supplemental appropriation has been enacted (P.L. 116-123), and the Federal Reserve has
reduced interest rates by 0.5 percentage points.

Economic Estimates
Two recent studies attempt to quantify the potential economic effects of the outbreak. The purpose of
these studies is to illustrate how the economy would be affected under different outbreak scenarios rather
than to provide the best projection of the outbreak’s scope.
OECD. In its base-case scenario—a contained outbreak centered in China—the Organisation for
Economic Co-operation and Development (OECD) stated “global GDP growth is projected to slow from
2.9% in 2019 to 2.4% this year, before picking up to around 3¼ per cent in 2021 as the effects of the
coronavirus fade and output gradually recovers.” In this scenario, U.S. growth is only 0.1 percentage
points lower in 2020 and is 0.1 percentage points higher in 2021. Despite the negative impact of COVID-
19, the OECD projects a global recession is averted as growth remains positive in all the major
economies—including China—except Italy. The base-case scenario assumes the outbreak peaks in the
first quarter of 2020 and gradually fades thereafter. (The OECD did not report specific estimates on the
number of illnesses or fatalities.) The base-case scenario also incorporates an assumption that monetary
stimulus is used around the world to offset the negative effects.
The OECD also presents a “domino scenario” where the virus “spread much more intensively ... through
the wider Asia-Pacific region and the major advanced economies in the northern hemisphere.” In this
scenario, “the level of world GDP is reduced by up to 1¾ per cent (relative to baseline) at the peak of the
shock in the latter half of 2020, with the full year impact on global GDP growth in 2020 being close to 1½
per cent.” The OECD does not present an estimate for the effect on U.S. growth in the domino scenario,
but growth in North America would decline by 1.5 percentage points. Figure 1 illustrates both scenarios
presented by the OECD.
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Figure 1. Projected Decline in 2020 GDP Growth Under Two Scenarios
OECD

Source: Organisation for Economic Co-operation and Development (OECD).
Notes: *For the domino scenario, “U.S.” is for North America.

McKibbin and Fernando. A Brookings Institution working paper by Warwick McKibbin and Roshen
Fernando used a long-standing economic forecasting model developed by one of the authors to simulate
economic effects under seven different outbreak scenarios—three that limit the outbreak to China and
four in which the outbreak is worldwide. (The paper does not provide the relative likelihood of the
various scenarios.) The model projects that “even a low-end pandemic modeled on the Hong Kong Flu is
expected to reduce global GDP by around $2.4 trillion and a more serious outbreak similar to the Spanish
flu reduces global GDP by over $9 trillion in 2020.” The loss in U.S. GDP relative to the 2020 baseline
varies between 0.1%-8.4% across the scenarios. The scenarios assume a decline in the labor supply of
0.1%-3.44% in China and 0%-1.3% in the United States.

Table 1. Projected Decrease in 2020 GDP Under Various Scenarios
McKibbin and Fernando
Decrease in 2020 GDP Relative to Baseline

Scenario COVID-19 Deaths United States China

Scenario 1 China: 279 -0.1 -0.4
Scenario 2 China: 3,493 -0.1 -1.9
Scenario 3 China: 12,573 -0.2 -6.0
Scenario 4 China: 2,794; U.S.: 236 -2.0 -1.6
Scenario 5 China: 6,985; U.S.: 589 -4.8 -3.6
Scenario 6 China: 12,573; U.S.: 1,060 -8.4 -6.2
Scenario 7 China: 2,794; U.S.: 236 -1.5 -2.2

Source: McKibbon and Fernando
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Notes: In Scenarios 1-3, the mortality rate for the rest of the world is negligible. In Scenario 7, the outbreak recurs
annually; in the other scenarios, it is a one-time outbreak.

U.S. and global growth had been projected to be moderate before the outbreak. Therefore, the economic
effects of COVID-19 could result in a growth slowdown but would have to be large for the economy to
contract, as the forecasts above illustrate. The estimated effects presented above are for the whole year; it
is expected, however, that the economic effects will be larger in the first half of the year.

Author Information

Marc Labonte
Specialist in Macroeconomic Policy

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