The spread of the novel coronavirus – formally named COVID-19 – has infected more than 350,000 people in at least 190 countries and become one of the biggest threats to the global economy. The coronavirus-induced panic forced countries around the world to impose wider restrictions on the movement of people and business operations. The unprecedented containment measures severely disrupted the economic activity and fueled fears that a global economic recession is now all but guaranteed in 2020.
Chinese Manufacturing Hits Record Low
The impact on the Chinese economy has been extremely damaging, effectively bringing the country to a standstill. The manufacturing sector in the world’s second-largest economy – the epicenter of the pandemic – has been hit hard during the first two months of the year. The much-awaited data from China showed that industrial output fell by 13.5% in January-February from the same period a year earlier and marked the weakest reading on record. China makes up a third of manufacturing globally and is the world’s largest exporter of goods. A subdued manufacturing activity in China – dubbed as the factory of the world – interrupted the supply chain for industries relying heavily or solely on factories in the mainland.
Coronavirus Impact on Chinese Economy
To make things worse, the disease has been spreading rapidly to other parts of the World and hurting demand for the products from Chinese factories. Economists have struggled to come up with estimates of the economic damage but the projections are becoming grimmer. Sagging demand in export markets suggests that the economy is not going to recover fully anytime soon. Hence, the question now becomes how much damage is already done and how long the downturn will last. A range of banks and financial institutions downgraded their outlook for the Chinese economy and anticipate a historic contraction in the first quarter. Moreover, estimates for 2020 growth vary from 1% to 4% against the original target of 6%.
Looming Global Recession
The worst-case scenario sees weak economic growth continuing into 2021 and drag down the global economy along the way. The Organization for Economic Cooperation and Development (OECD) predicted that global growth could weaken to 1.5% in 2020. Given the nationwide lockdowns around the world, rise in coronavirus cases in the West and no end in sight, the forecast might still prove to be very optimistic. On the other hand, the International Monetary Fund (IMF) belatedly recognized the deep damage to the global economy and conceded that the coronavirus crisis will push the world economy into recession, at least as bad as during the 2008-09 global financial crisis or worse.
A Coordinated Effort by Central Banks
This helps explain the case for a coordinated move by central banks around the world to cut their interest rates to record lows and by governments to pump huge amounts of money into their economies. Major central banks, individually and collectively, took actions to calm investors’ nerves following the recent crash in financial markets and also announced new measures to stop dollar funding issues. Even with massive fiscal stimulus measures and interest rate cuts, the ongoing downward spiral in crude oil prices could make things even worse for the global economy and lead to further downward revisions.
Plunging Oil Prices Add to Jitters
Against the backdrop of a price war between Saudi Arabia and Russia, oil nosedived to the lowest level since 2002 amid concerns over severe demand destruction caused by the COVID-19 pandemic. With the addition of two to four million bpd from OPEC+ in April, oil prices are destined to plunge to all-time lows and even below production costs on the back of a large potential oversupply situation. However, the coronavirus outbreak will offset any positive economic effects for the net oil importers and exacerbate the negative economic effects for the net oil exporters.
Summing it Up
Although the situation is highly uncertain at this stage, a global economic contraction during the first and second quarters of 2020 looks increasingly likely. The longer the pandemic lasts, and the more dramatic the efforts are to contain it, the more profound the effects will be for the global economy. Whether the damage is contained to a few months or becomes something longer-lasting will depend on the policy response. For now, investors are likely to remain on the sidelines and refrain from venturing into any of the perceived riskier assets until the virus runs its course.