Huge red flag for oil: Global economic growth could be cut in half

A prolonged and wide-ranging coronavirus outbreak could cut global economic growth to just 1.5 percent this year and have serious consequences for oil demand.

A significant drop in global economic growth is very bad news for oil demand, which has already been depressed by the outbreak.

Yet, the OECD’s (Organisation for Economic Cooperation and Development) base-case scenario is that the outbreak would peak in China in Q1 2020 and outbreaks in other countries are mild and contained. In this event, global growth could be just 0.5 percent lower in 2020 compared to the projections the OECD made in November 2019, the organization said in its Interim Economic Assessment today.

In this scenario, “annual global GDP growth is projected to drop to 2.4% in 2020 as a whole, from an already weak 2.9% in 2019, with growth possibly even being negative in the first quarter of 2020,” OECD said.

However, if the outbreak lasts longer and spreads throughout Asia Pacific, Europe, and North America, this would materially weaken the global economy, with growth possibly dropping to just 1.5 percent in 2020, half the rate projected before the outbreak.

The coronavirus outbreak has significantly weakened near-term global economic prospects, but the OECD still sees a ‘contained outbreak’ as the base-case scenario.

However, the organization warns that downside risks remain significant and urged governments “to act swiftly and forcefully to overcome the coronavirus and its economic impact.”

The International Monetary Fund (IMF) warned last month that China’s growth could drop to 5.6 percent this year due to the coronavirus, down by 0.4 percentage points compared to the January estimate, while global growth would be about 0.1 percentage points lower than previous estimates.

“But we are also looking at more dire scenarios where the spread of the virus continues for longer and more globally, and the growth consequences are more protracted,” the IMF’s Managing Director Kristalina Georgieva said.

As more and more countries started reporting coronavirus cases last week, oil prices plunged by 14 percent in a week as market participants fear a significant global economic slowdown and, by extension, weak global oil demand.

This article was originally published on Oilprice.com