Coronavirus: global recession fears triggered by failure to contain Covid-19 spread

Karen Yeung

A failure by governments in major western countries to contain the coronavirus outbreak is fuelling the perception in financial markets worldwide that the global economy is headed for a deep recession because of the severe, and in many cases, permanent damage being done to businesses.

Financial markets had initially expected the economic trajectory of the current outbreak to mirror that of the severe acute respiratory syndrome (Sars) epidemic in 2002-2003, which sharply declined before enjoying a quick and sustained or so-called V-shaped recovery, as pent up demand offset the initial damage from the outbreak.

But that complacency has changed into panic over the past three weeks as authorities in Europe and the United States failed to contain the rapid spread of the coronavirus and so mitigate the resulting economic damage.

US equities suffered their biggest drop since the 1987 crash on Monday, with the S&P 500 down almost 30 per cent from its historic peak in mid-February.

Markets lack confidence as policymakers have been caught off guard by the virus and the speed of its effects

Mitch Reznick

“Markets lack confidence as policymakers have been caught off guard by the virus and the speed of its effects,” said Mitch Reznick, head of research and sustainable fixed income at Federated Hermes, a US-based investment manager.

“Uncertainty around the virus remains – whether there will be a vaccine, or if [the virus] will resurface once it dissipates. Policymakers and central banks are still finding their sea legs to manage its effects.”

The market uncertainty comes even after the US Federal Reserve and other central banks around the world took action in an attempt to keep the financial system afloat.

At the weekend, the US Federal Reserve cut its main interest rate for the second time in two weeks and announced a massive purchase of US$700 billion of bonds to divert money into financial markets and avoid a cash shortage.

The Reserve Bank of New Zealand also enacted an emergency rate cut on Sunday, with Asian central banks expected to join the global monetary easing cycle in the coming days.

China has already cut the amount of funds lenders have to set aside as reserves, pumping 550 billion yuan (US$78.5 billion) into the banking system, while central banks in Canada, Britain, Japan, and Switzerland, along with the European Central Bank, have announced coordinated action to ensure sufficient supplies of US dollars to meet market demands.

But central bank moves are seen as insufficient to alleviate the economic damage caused by the spread of the coronavirus, according to analysts, with experts agreeing more synchronised global fiscal stimulus and virus containment policies are needed by governments across the globe.

According to International Monetary Fund chief Kristalina Georgieva “ there is a lot more work to do” as during the global financial crisis fiscal stimulus by the Group of 20 economies in 2009 alone amounted to about 2 per cent of their gross domestic product, which now would require the equivalent of over US$900 billion.

In early 2009, the S&P 500 declined around 50 per cent from its 2007 peak before embarking on a rally that lasted over a decade.

But given that current economic problems are not due to a banking crisis, as they were in 2008-2009, it is not clear at this stage if even a fiscal deluge , let alone emergency easing actions by major central banks, can repair global supply chains and resuscitate end-user demand to get the global economy back on track.

The source of panic this time round comes from a health crisis that has real human costs, both in terms of individual fatalities and the significant disruption caused to working and personal lives. This is having an increasingly negative impact on consumer spending and business investment, exacerbated by the restrictions on travel both within and between countries.

Wi th the overall scale and impact of the outbreak is difficult to gauge given the continued rapid increase in new cases outside China , virtually every global industry will be fighting for survival without a public bailout, analysts warned.

“The nature of the shock that policymakers around the world are dealing with is very different from what they’ve dealt with in the past. It’s not a liquidity crisis nor is it a traditional recessionary shock,” said Gaurav Saroliya, director of macro strategy at Oxford Economics.

While individual European countries have announced lockdowns of their economies or increased border restrictions, an extreme, China-style clampdown would be hard to implement, meaning the fallout from the epidemic could last longer in Europe, with infections continuing to increase rapidly.

A Public Health England report in Britain predicted that the crisis would last for another year, with 7.9 million hospitalised, leading to as many as 531,100 deaths in Britain alone, The Guardian reported.

Union Bancaire Privee, a Swiss wealth manager, said in a recent report that the fact that containment efforts in Europe were less onerous than those seen in China risked the virus spreading in Europe for a longer period of time.

The health response and how businesses change the way they do things to minimise the spread are ultimately more important than what the central bank can do

Khoon Goh

Alex Holmes, Asia economist for consultancy firm Capital Economics, said the US’ rudimentary measures in terms of temperature checks, and complacency in testing efforts, are raising concerns over the development of the virus.

The travel restrictions that the US have imposed are also expected to put a drag on economic activity that could potentially damage global growth.

“The health response and how businesses change the way they do things to minimise the spread are ultimately more important than what the central bank can do,” said Khoon Goh, ANZ Bank's head of Asia research.

“I think first quarter growth definitely, for many countries, it will be difficult to avoid an outright contraction. Next it really depends on the measures that governments take now to see whether or not they are able to salvage [second quarter growth] or not.”

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