The Australian economy could be plunged into recession if the coronavirus outbreak goes global, with as much as 8% carved from growth over a year, according to new modelling by the economic expert Warwick McKibbin.
McKibbin, whose previous work on the economic impact of disease includes examining the impact of the 2002 Sars pandemic, has modelled the effects of a range of Covid-19 infection scenarios on growth in Australia and around the world.
He said if the disease went global it could carve as little as 2% from Australian growth, but this would still be enough to send the economy into recession, given that GDP increased by just 1.7% in 2019.
In the worst-case scenario, where the disease spreads aggressively and kills 3% of patients, Australias GDP would plunge 7.9% in the first year before quickly bouncing back.
McKibbin, a professor at the Australian National University and a former board member of the Reserve Bank, cautioned that his results were very sensitive to the assumptions used, including government responses.
“While cutting interest rates is an option, the shock will require a mix of monetary, fiscal and health policy responses,” he said. “Quarantining affected people and reducing large-scale social interaction would be an effective response.”
He said the outbreak showed that no country was an island given the tight integration of the global economy.
“Our study suggests big economic costs in countries such as Australia can be avoided through global cooperative investment in public health in all countries,” he said.
“We have known this for decades, yet politicians continue to ignore the scientific and economic evidence about the role of global public health in improving the quality of life and driving economic growth for us all.”
The crisis has already caused a plunge of more than 10% in stock markets across the globe, although shares staged a small recovery in North America on Monday night and were rallying in Australia on Tuesday, to be up almost 1.9% at lunchtime.
Financial markets expect that the RBA will cut official interest rates to a new record low of 0.5% at a board meeting on Tuesday afternoon.