The impact of the coronavirus

The novel coronavirus (Covid-19) that originated in Wuhan, central China, in December 2019 is now a global pandemic. The Economist Intelligence Unit assumes that the virus will infect about 50% of the world population; 20% of cases will be severe and 1-3% will result in death. Death ratios will depend on the capabilities of countries to detect, track and contain the epidemic, and on the capacities of national health systems. We believe that a mass vaccine will be available at end-2021 (at the earliest) and that the coronavirus will become a seasonal disease, with another outbreak in winter 2020/21. Quarantine measures will be effective in limiting the spread of the disease, but they will have severe negative economic consequences. In addition, disruption to global supply chains will be severe. Overall, we forecast that global output will contract by 2.2% in 2020, and that global trade will drop by 1.4%. All G7 countries and almost all G20 countries will experience a full-year recession in 2020. We forecast real GDP growth in China of 1% in 2020 and a full-year recession of 2.8% in the US. Most countries have responded with huge fiscal expansion to support businesses and households, raising the risk of sovereign debt crises in the medium term. Central banks have cut interest rates and, more importantly, have stepped up as buyers of last resort for government and corporate debt.

The pandemic is at different stages in Asia. Those economies that were confronted by the virus first, including China, Hong Kong, Japan, Singapore, South Korea and Taiwan, managed to contain initial outbreaks in January and February through a combination of lockdowns, large-scale testing and contact tracing. However, they are now confronting a "second wave" of cases imported from new global hotspots and implementing fresh domestic and international travel restrictions. After lagging initially, emerging economies in South and South-east Asia are experiencing a jump in cases. Dense populations and inadequate healthcare infrastructure in such countries point to the risk that the coronavirus will have a devastating impact. India has responded through a 21-day nationwide lockdown; other countries are adopting similarly economically disruptive methods. Meanwhile, in Australasia, the virus has prompted quarantine measures and large stimulus packages in Australia and New Zealand, and has begun to intrude upon the Pacific Islands.

The spread of the virus in the Maldives has been contained in comparison with neighbouring South Asian countries. By April 13th only 20 cases of coronavirus had been reported in the Maldives, with no deaths. Except for the one most recently reported, the cases have been linked to either foreigners working or staying at tourist resorts or Maldivians who had returned from abroad. The government has handled the pandemic with great caution, as the risk of a rapid spread of infection was very high in the archipelago, which teems with foreigners. The country's borders have been closed for international tourists, and most guesthouses and resorts have been shut down across the country bringing tourism activity to an almost complete halt. Given the economy's heavy reliance on tourism earnings, the strict measures, which have undoubtedly helped to prevent a major public health crisis in the country, will result in significant economic disruption. Real GDP will decline sharply in 2020 and the economy will have to face wage cuts and increased unemployment. Fiscal and monetary stimulatory measures by the government and the Maldives Monetary Authority (MMA, the central bank), respectively, will provide some support but a recession will be inevitable this year.

The coronavirus pandemic will have a severe economic impact. Normally buoyant GDP growth in Asia and Australasia will come down sharply, to 0.5% in 2020. Global quarantine measures will result in a supply-side shock, hitting working hours and productivity. This will have knock-on effects for global supply chains, many of which are Asia-focused. Meanwhile, the region's trade-oriented economies will also face a demand shock, as export demand collapses in key Western markets. Those economies that are less dependent on trade will not be insulated. Domestic demand will slump as consumer confidence falls and households restrict spending to essential items in the short term. Fear of contagion will prompt people to avoid public spaces, and tourism will not resume normally for a lengthy period. Businesses will face operating challenges, and even those strong enough to weather the storm are likely to delay investment. Foreign direct investment (FDI) flows in the region will slow markedly.

The political and geopolitical impact could be seismic. In the short term, a failure to address the humanitarian or economic crisis triggered by the coronavirus could bring down administrations, either through the ballot box or via social unrest. Even governments in non-democratic countries will face intense scrutiny over their response to the epidemic. The crisis may deepen the backlash against globalisation and open borders. The competition for global leadership between China and the US will intensify, as the countries exchange criticism over their handling of the crisis. This will strain security relations within Asia, and the distraction of major powers may encourage opportunism among some regional actors.

Economic growth

The tourism sector accounts for almost one-quarter of the Maldives' GDP, making it one of the main drivers of economic growth in the country. China is the largest source of visitors, accounting for almost one-fifth of total tourist arrivals in 2019. The lopsided reliance of the economy on the tourism sector makes it extremely vulnerable during the coronavirus pandemic. The tourism sector will take a major hit in 2020 as government restrictions on foreign arrivals, coupled with widespread wariness about international travel, will crimp activity. Although fiscal and monetary stimulus will provide support, it will not be enough to stop the economy from sliding into recession this year. Wage cuts and job losses stemming from the disruption to the economy from quarantine measures will curtail household spending. Consequently, we expect private consumption expenditure to decline by 2%. Overall, real GDP will shrink by 4.3% in 2020.

In the following year as the world recovers from the aftermath of the coronavirus pandemic, global economic conditions will start to improve. The tourism sector would slowly pickup, driving a modest increase of 2.7% in real GDP in 2021.