Will coronavirus cause a global recession?
The rapidly spreading coronavirus threatens the health of world economies, too. The odds of a U.S. recession within the next year are at the highest level since the end of the last downturn in 2009. Germany, the economic engine of Europe, and the U.K. were both on the precipice of a decline even before the virus struck, with 0% growth in the fourth quarter of 2019. China, the world’s second-largest economy and the place where the pandemic originated are likely to have contracted in the first quarter for the first time in decades amid production halts and quarantine measures, ultimately weighing on the global economy.
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What is a recession?
The dictionary definition is a period when economic output contracts for two straight quarters. The National Bureau of Economic Research’s Business Cycle Dating Committee, which makes the official U.S. determination, uses a different approach, considering factors such as inflation-adjusted GDP, employment, industrial production and income. The International Monetary Fund, in designating recessions on a global scale, looks at several indicators including a decline in inflation-adjusted per-capita GDP that’s backed up by weakness in industrial production, trade, capital flows, oil consumption and unemployment.
What causes a recession?
The so-called Great Moderation, a roughly 25-year period of relative stability around the globe beginning in the mid-1980s, spawned the view that modern-day recessions don’t happen without an unexpected economic shock like a sharp increase in oil prices—a cause of U.S. downturns of the 1970s and 1980s—or accumulated imbalances like the massive buildup in the subprime-lending industry that preceded the Great Recession of 2007-2009. A global pandemic that stifles travel, shutters businesses, cancels sports events and sends stock markets into freefall certainly has the potential to be that kind of economic shock.
The coronavirus outbreak is now a pandemic, and there are fears it can lead to a catastrophic global economic crisis. Sweeping containment measures have disrupted markets around the world - including in the United States.
A travel ban on 26 European countries came into effect on Friday, and the unprecedented move sent stocks crashing to their worst losses in over 30 years.
On Wall Street, the Dow Jones Industrial Average sank 10 per cent on Thursday - its biggest plunge since the Black Monday crash of 1987. Fears are growing that the worldwide economic downturn could be especially deep and lengthy, with recovery limited by continued anxiety.
The world is almost certainly trapped in a devastating recession delivered by the coronavirus pandemic. Now, fears are growing that the downturn could be far more punishing and long-lasting than initially feared — potentially enduring into next year, and even beyond — as governments intensify restrictions on business to halt the spread of the pandemic, and as fear of the virus reconfigures the very concept of public space, impeding consumer-led economic growth.
The pandemic is above all a public health emergency. So long as human interaction remains dangerous, a business cannot responsibly return to normal. And what was normal before may not be anymore. People may be less inclined to jam into crowded restaurants and concert halls even after the virus is contained.
The abrupt halt of commercial activity threatens to impose economic pain so profound and enduring in every region of the world at once that recovery could take years. The losses to companies, many already saturated with debt, risk triggering a financial crisis of cataclysmic proportions.
Stock markets have reflected the economic alarm. The S&P 500 in the United States fell over 4 per cent on Wednesday, as investors braced for worse conditions ahead. That followed a brutal March, during which a whipsawing S&P 500 fell 12.5 per cent, in its worst month since October 2008.
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Will coronavirus cause a global recession?
The global economy is already in a recession as the hit to economic activity from the coronavirus pandemic has become more widespread, according to economists polled by Reuters amid a raft of central bank stimulus actions this week.
The spread of the disease caused by the virus, COVID-19, has sent financial markets into a tailspin despite some of the most significant emergency stimulus measures since the global financial crisis announced by dozens of central banks across Europe, the Americas, Asia and Australia.
The panic was evident in stocks, bonds, gold and commodity prices, underlining expectations of severe economic damage from the outbreak. More than three-quarters of economists based in the Americas and Europe polled this week, 31 of 41, said the current global economic expansion had already ended, in response to a question about whether the global economy was already in recession.
Well, that was bad. The Dow Jones Industrial Average fell more than 2,000 points on Monday, over growing fears about the new coronavirus outbreak and oil prices. Markets in Europe and Asia also tumbled, in one of the worst weeks for stocks since the 2008 financial crisis. This is just the latest grim economic news. The spread of COVID-19, as the disease is formally known, is unsettling supply chains, sapping sales of some products, throwing travel into chaos, freaking out the stock markets, and intensifying fears of a global recession.
There’s still so much we don’t know about the coronavirus, which makes the potential economic fallout extremely uncertain, for both China and the rest of the world. It is also difficult to completely isolate one factor — in this case, a virus outbreak — from everything else happening in the world that can rattle the markets or strain economies.
So how deep, lasting, or widespread any economic fallout will be is hard to predict. But it’s clear from how wildly markets are reacting, and from the responses of governments — just last week, the Federal Reserve cut interest rates — that the world is bracing for a potential coronavirus-linked downturn.
China makes up a much larger share of the world economy than it did in 2003, when SARS, another illness caused by a type of coronavirus, broke out. Today, companies like Apple and Nike and other manufacturers and companies around the world are already admitting they’re feeling the harmful effects of the virus. So too are industries tied to travel and tourism. Airlines, cruise lines, hotels; they all take a hit during outbreaks due to travel bans and warnings, and general fears — real or excited — about contagion.
Travel bans. Sporting events cancelled. Mass gatherings prohibited. Stock markets in freefall. They deserted shopping malls. Get ready for the COVID-19 global recession.
Up until a month ago, this seemed far-fetched. It was assumed that the coronavirus outbreak would be a localised problem for China and that any spillover effects to the rest of the world could be comfortably managed by a bit of policy easing by central banks.
When it became clear that COVID-19 was not confined to China and that the economic effects would be more widespread, forecasts started to be revised down. But central banks, finance ministries and independent economists took comfort from the fact that there would be a sharp but short hit to activity followed by a rapid return to business as usual.
The U.S. slashes interest rates as states go into lockdown – as it happened
This line of thinking had exact parallels with the events of 2007 when it was initially assumed that the subprime mortgage crisis was a minor and manageable problem affecting only the U.S. – and nobody needs reminding how that ended.
If history is any guide, the global economy will eventually recover from the COVID-19 pandemic. Still, the idea that this is going to be a V-shaped recession in the first half of 2020 followed by a recovery in the second half of the year looks absurd after the tumultuous events of the past week.
What’s more, policymakers know as much. The Federal Reserve – the U.S. central bank – did not need to be told by Donald Trump that it was necessary to cut interest rates and resume large-scale asset purchases known as quantitative easing. The world’s most powerful central bank pulled out the stops on Sunday night by slashing prices to nearly zero and pledging to expand its balance sheet by $700bn.
Economists at Goldman Sachs Group Inc. and Morgan Stanley believe so, and the debate is shifting to how long and deep the slump will be. The economies of Japan, Germany, France and Italy were already shrinking or stalled before the virus outbreak. As of March, China was on course for what could be its first quarterly contraction in decades. As the virus spreads, the threat grows of a phenomenon economists refer to as a feedback loop—a vicious cycle in which a country that starts to recover domestically then suffers diminished demand from abroad as other nations succumb, prolonging the downturn. The International Monetary Fund has counted only four global recessions tracing back to 1960, compared to the 11 scored in the U.S. since World War II by NBER.
The stock market sure is nervous. Here’s why.
As of March 9, more than 100,000 cases of the coronavirus have been diagnosed worldwide. The virus has now spread to other parts of Asia, Europe, South America, and the United States. Nearly 4,000 people have died, most in mainland China, the epicentre of the outbreak.
The fear that coronavirus will continue to spread and impact the global economy looks to be the main reason for the economic jitters. The coronavirus could prove to be deadlier than it currently is; the fatality rate is around 2 per cent, but that could change. It could also prove to be the opposite if more people are found to have mild cases. The coronavirus could become a pandemic; it could even taper off. Government intervention could dull the effects in populations; a bungled response could do the opposite.
The stock market isn’t the economy, but it’s a signal that investors are worried about the economic outlook for the coming year because of the virus. They’re predicting that the coronavirus will continue to spread and cause more disruptions, depress demand, and maybe create a global slowdown.
This is especially true in industries that cater to travel and tourism, which are being hammered by the outbreak. This has been made worse by cancellations of significant events — think the South by Southwest (SXSW) festival in Austin, usually a boon to the local economy — and fears that will be replicated in the U.S. and around the world.
The fight between Saudi Arabia and Russia over oil production that sparked a dip in oil prices Monday has compounded fears of a broader slowdown.
Right now, investors don’t know for sure that a global slowdown is going to happen — no one does — but they’re preparing as if it will. They’re reacting to fears now, but if good news starts breaking, it could swing in the other direction. “Last week we concluded that the COVID-19 shock would produce a global recession as nearly all of the world contracts over the three months between February and April,” noted Bruce Kasman, head of global economic research at JP Morgan.
“There is no longer doubt that the longest global expansion on record will end this quarter. The key outlook issue now is gauging the depth and the duration of the 2020 recession.” Economists have repeatedly cut their growth outlook over the past month and have increased their forecast probabilities for a recession in most major economies.
The worst-case views on growth taken just weeks ago in some cases have already into the central scenario for private-sector economists in Reuters polls.
“The evolving news on COVID-19 has triggered ‘forecast leapfrogging,’ with economists and strategists repeatedly lowering their forecasts. Among the big three economies, the U.S. and the euro area will see negative growth, while Chinese growth is expected to come in at a paltry 1.5%,” said Ethan Harris, head of global economics at BofA.
“Our first piece on the virus shock was titled ‘bad or worse’; now we amend that to ‘really bad or much worse.’ We currently expect COVID-19 to cause a global recession in 2020, of similar magnitude to the recessions of 1982 and 2009.”
So, in the coming weeks, the bank can be expected to cut interest rates to 0.1% – the lowest they have ever been – and to resume its Q.E. programme. Sunak will have to add to the £12bn he has set aside to deal with COVID-19. As in 2008-09, the authorities in the eurozone have been slowest to act, but there have been welcome signs in recent days – from Germany, most significantly – of the need for governments to spend and spend big.
It has been clear from the start that COVID-19 affects both sides of the economy: supply and demand. The amount of goods and services is impaired because factories and offices are shut, and output falls as a result. But the market also falls because consumers stay at home and stop spending, and businesses mothball investment.
Conventional policy measures – such as cutting the cost of borrowing or reducing taxes – tend to work better when there is a demand shock. There is a limit to what they can do in the event of a combined supply and demand shock. What’s more, in a service-sector dominated economy, much of the lost output is never going to be recovered. If people do not go out to their weekly meal at their favourite local restaurant for the next two months, they are not going to eat out four times a week when the fear of infection has been lifted.
It also seems likely that the economic pain will go on for longer than initially estimated. Having imposed bans and restrictions, governments and private-sector bodies will be cautious about removing them. Countries such as Italy will be wary of opening their borders while there is a fear of reinfection. The idea that Premier League football will be back by early April is fanciful.
There is also a question of how long it will take consumer and business confidence to recover. Policy action by central banks and finance ministries can help in this respect but only so much. The chances are that the imminent recession will be U-shaped: a steep decline followed by a period of bumping along the bottom. There will be a recovery, but it will take time and only after much damage has been caused.
The sense of alarm is enhanced by the fact that every inhabited part of the globe is now in trouble. The United States, the world’s largest economy, is almost certainly in a recession. So is Europe. So probably are significant economies like Canada, Japan, South Korea, Singapore, Brazil, Argentina and Mexico. China, the world’s second-largest economy, is expected to grow by only 2 per cent this year, according to TS Lombard, the research firm.
For years, a segment of the economic orthodoxy advanced the notion that globalisation came with a built-in insurance policy against collective disaster. So long as some part of the world economy was growing, that supposedly moderated the impact of a downturn in any one country.
The global recession that followed the financial crisis of 2008 beggared that thesis. The current downturn presents an even more extreme event — a worldwide emergency that has left no safe haven.
In the most optimistic view, the fix is already underway. China has effectively contained the virus and is beginning to get back to work, though gradually. If Chinese factories spring back to life, that will ripple out across the globe, generating demand for computer chips made in Taiwan, copper mined in Zambia and soybeans are grown in Argentina.
But China’s industry is not immune to global reality. Chinese consumers are an increasingly powerful force, yet cannot spur a full recovery if Americans are still contending with the pandemic if South Africa cannot borrow on world markets and if Europe is in recession, that will limit the appetite for Chinese wares.“If Chinese manufacturing comes back, who exactly are they selling to?” asked Mr. Rogoff, the economist. “How can global growth not take a long-term hit?”
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