The COVID-19 epidemic will exacerbate existing problems in the world economy, but it isn't the cause. Anemic growth in Europe, a slump in Japan, and American stagnation, reveal an underlying crisis of profitability holding back investment. 

Although China is the country worst affected by the disease, the structure of its economy means it's actually best placed to overcome the crisis. 

When finance ministers and central bankers of the world's 20 leading economies met in Riyadh, Saudi Arabia for the G20 finance summit on Feb. 22, they considered the global consequences of the new coronavirus outbreak on growth, trade and investment. 

IMF managing director, Kristalina Georgieva, who had previously announced a reduction in IMF forecasts for global growth to just 2.9%, further reduced prospects by 0.1 percentage points to the lowest figure since 2009. 

The IMF expects China to return to its predicted growth rate by the second quarter of this year; if so, the world impact of the disease in economic terms will be limited. However, it has also been considering more damaging worst-case scenarios. 

Zhu Min, a former IMF deputy managing director, reckoned COVID-19 could strip $185 billion out of the Chinese economy in January and February. Dips in tourism and consumer spending could reduce first-quarter growth by three or four percentage points. 

While online spending – particularly on education and entertainment services – could offset some losses, the total drain on the economy over the period could be as much as 1.38 trillion yuan, equivalent to about 3.3% of the country's total retail sales in 2019.

Car sales fell by 20.5% year-on-year in January, the largest monthly dip in 15 years, according to the China Passenger Car Association. Sales in the first two weeks of February fell 92% from the same period in 2019, mainly due to showroom closures. This year, the epidemic could cost China 1 million car sales, or about 5% of its current annual total. 

More optimistically, Chen Yulu, a deputy governor of the People's Bank of China, said policymakers had plenty of tools to support the economy, amid national confidence in beating the epidemic. And he expects demand for investment and consumption to rebound swiftly when it ends. 

Indeed, given the size of the public sector and the ample policy tools in China, a fiscal boost can have a huge impact, as it did during the 2008-9 Great Recession, when China continued to grow while virtually every other economy slowed dramatically. The government is ready to act to turn things round, although, any prolonged slowdown in China will add to the woes of the major economies. 

Elsewhere, the ability and willingness of governments to resort to effective fiscal injections is limited. Nevertheless, Japan's Finance Minister Taro Aso called on G20 countries with "fiscal space," such as Germany, to ramp up spending to help the global economy. 

Japan has deployed fiscal spending quite a bit, and it wants others to do the same. However, there is a problem. Japan's permanent annual budget deficits failed to prevent the economy from slipping into recession, even before the effects of COVID-19 hit. 

Yet, Aso did claim Japan is recovering moderately as a tight job market and rising household incomes offset some of the weaknesses in exports and output. 

The reality is that fiscal stimulus will have a negligible effect on achieving economic recovery in the leading economies. Once a slump sets in, the capitalist sector cuts investments and consumers reduce spending, because government spending outside of welfare transfers occupies no more than 10% of GDP, and government investment (as opposed to spending on public services) is no more than 3% compared to 15-20% invested by the capitalist sector. It would take a huge increase in government investment to have an effect.

The so-called Purchasing Managers' Index (PMI) measures expected investment levels. A figure above 50 indicates increased investment and expansion, and below 50 contraction. Recent data for the major advanced economies makes for somber reading. 

Japan's business activity index in February fell to 47.0 from 50.1 in January – the steepest contraction in private sector activity since April 2014. Japan is clearly in a slump. Eurozone private sector activity showed a slight improvement in February. The PMI increased to 51.6 in February from 51.3 in January, so the Eurozone is still growing but at snail's pace.

The shock news was the U.S. Its economic activity indicator went below 50, signaling a contraction in the economy for the first time since the PMI survey began in 2014. The overall "composite" indicator fell to 49.6 in February from 53.3 in January. The manufacturing index also fell to 50.8 from 51.5 in January. The service sector fared worse, its index dropping to 49.4 from 53.4. So, the U.S. joined Japan and the Eurozone in stagnating or contracting in Q1 2020. Other G20 economies are also wavering with Australia's index below 50 in February and South Africa was the same. 

Until recently, the world's stock markets ignored these risks, convinced that zero or negative interest rates for borrowing and speculating would continue, thanks to the U.S. Federal Reserve, and also in expecting the epidemic to dissipate by the end of this quarter. However, with Italy, South Korea and Iran now struggling to contain the virus, the uncertainty is now shaking global stock markets. 

Michael Roberts is a London based Marxist economist. He published the "The Great Recession" in 2008 and "Essays on Inequality" in 2014.

Heiko Khoo is a columnist with China.org.cn. For more information please visit:

http://china.org.cn/opinion/heikokhoo.htm

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