It’s been a grim week for investors. RNZ reported the local sharemarket continued to slide yesterday, because of anxiety about the coronavirus and the prospect of it sparking a global recession, and the NZ dollar tumbled after the first case in this country was confirmed.
The market mayhem was induced by the global panic as news of more coronavirus cases, notably in Italy, raised concerns of the virus’s economic impact being much greater than previously expected.
The market started the week at a record high but fell every day and had lost almost 7 per cent by the end of trading on Friday.
The three main US indexes ended the week down 10% or more.
“A known unknown” is how one major company boss described the economic fallout of coronavirus to the BBC, which reported the markets have woken up to the disruption to the economic activity from coronavirus being wider, deeper and perhaps longer lasting than previously assumed.
As major outbreaks spring up outside China, it is clear that it is not just global supply chains but also demand from consumers that’s suffering, as efforts to contain the virus keep them away from shops, bars and restaurants.
What is unknown is exactly how bad and how lasting the impact could be. But what is known is that this comes at an already tricky time for the global economy with Japan, Italy, China and the UK among those already seeing growth faltering.
As economists slash their growth forecasts, policymakers are debating how much they can do to help, given how low interest rates remain. What’s entirely clear is that investors face more anxiety ahead.
But at the New York Times business writer Neil Irwin warned that the development with the most profound signal about the future of the global economy has not been the steep drop in the stock market over the last week.
Instead, it’s what has been happening in the bond markets.
Global interest rates are plunging. Partly this reflects the general rush to safe investments that takes place whenever the world economy looks dangerous. But it also reflects expectations that the Federal Reserve and other central banks will cut interest rates or take other action to try to contain the economic damage of coronavirus.
That amounts to a powerful and pessimistic warning about the world economy in years to come. And that warning remains valid even if the economic damage from the coronavirus epidemic turns out to be mild and short-lived.
Usually longer-term interest rates fall to very low levels only at times of financial panic and recession, Irwin explained.
But currently, the economy is in sound shape and investors are seeing only the threat of economic disruption rather than the reality.
It is the financial markets’ way of saying that the Fed and other central banks will need to keep rates exceptionally low indefinitely — that the era of cheap money not only isn’t over, but is only beginning. And that leaves the world economy all the more vulnerable if things were to really take a turn for the worse.
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.
But 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 strain will be is hard to predict.
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.
Moreover, while much of the economic pain is centered in China and on companies that rely on China for parts or products. as the virus spreads the economic effects will worsen.
Kirby sums up:
Everyone wants to know if the new coronavirus will cause a global recession. The short answer is that it definitely could. Here, again, though, whether it will — and if it does happen, how bad it might be — depends on when the coronavirus emergency is resolved.
If the coronavirus isn’t contained and these trends continue, the likelihood of a global recession increases. It’s also important to remember that the coronavirus is just one factor, which might exacerbate other strains on the global economy, like trade wars.
Experts Kirby spoke to cautioned that if governments respond appropriately and this outbreak is blunted, the worst-case scenario will probably be avoided.
But even if the coronavirus doesn’t cause a recession, it could transform the global economy in subtler ways – spurring companies to cut some of their dependence on China, for example, as already has started to happen because of President Trump’s trade war.