In the early stage of the Covid-19 crisis, mobility restrictions in China have reduced local firms’ productivity. This negative supply shock has had worldwide consequences due to the propagation through global value chains. We estimate that a 10% productivity drop in Chinese productivity reduces GDP growth in Europe, by about 0.5 percentage points.
With more than 1 billion people currently under lockdown for an unlimited time period, it is hard to evaluate the possible impact of the coronavirus global spread on each country’s economy. Plants’ temporary closures and mobility restrictions affect the local production of goods and services with a magnitude that depends on the efficiency of remote work arrangements in various firms. The uncertainty regarding the end-effect of such a production slowdown is reinforced as production disruptions automatically propagate to other firms, through firm-to-firm trade links. This is true within countries across sectors, but also across countries within global value chains. While the virus spreads with physical infections, its economic impact is propagated through trade relationships.
As of today, it is difficult to separate what is attributable to local production disruptions from the propagation of shocks through value chains. Indeed, most developed countries are now affected by the virus and are implementing policies aimed at containing the health crisis. While necessary, each of these policies contributes to an economic contraction that is to a large extent becoming global. But the early stages of the epidemics offer a good opportunity to study how local economic shocks propagate through value chains. The quarantine measures imposed on the Hubei province on January 25th have indeed disrupted a number of international production chains, offering a dramatic demonstration of the interdependence of economies.