In just the past day or so, President Donald Trump curbed travel to the United States from Europe, Italy’s government ordered almost all shops to close, India suspended most visas and Ireland partially shut down. Twitter joined other companies in telling employees to work from home and the US National Basketball Association suspended its season.
While such announcements are aimed at containing the coronavirus, each quarantined city, cancelled flights, scrapped sporting events and cancelled conferences will hammer demand this quarter and likely longer. An initial consumer rush to stock up on essential supplies may be followed by months of cautious restraint.
Investors are sounding the alarm that policymakers are not doing enough, with a deepening rout in global stocks and strains in credit markets compounding the concern over the economic outlook.
The virus “has disrupted the global economy and has quickly morphed into a dislocation in financial markets too”, Morgan Stanley economists said in a report to clients warning of a “rising risk” of a full-blown global recession.
“The need of the hour is a quick, sizeable response from public health, monetary and fiscal authorities,” they said.
Dashed are the hopes from just a few weeks ago that the world economy would track a V-shaped trajectory – a sharp first-quarter slump in growth followed by a second-quarter rebound. Now, the biggest economic shock since the 2008 financial crisis is raising the risk of a worldwide recession, with the debate shifting to how long and deep the slump will be.
China is already on course for what could be its first quarterly contraction in decades. In the US, a Bloomberg Economics model suggests a 53 per cent chance that the 11-year expansion will end within a year. The economies of Japan, Germany, France and Italy were already shrinking or stalled before the virus outbreak, and Britain is wobbling amid Brexit uncertainty.
Take Italy. The spread of Covid19 has been particularly acute there. Being a user of the euro (as opposed to an issuer of the currency), the Italian government risks exposing itself to potential national bankruptcy (and the vicissitudes of the volatile private capital markets) if it responds with a robust fiscal response, absent the institutional support of Brussels and the European Central Bank (which is the sole issuer of the euro).
Italy remains particularly vulnerable as it has an ageing population. If coronavirus runs rampant through the country, it could potentially crash the nation’s entire hospital system. EU solidarity, showing cracks on issues ranging from finance to immigration, increasingly resembles every country for itself.
According to MarketWatch, “Italy needs a €500 to €700 billion precautionary bailout package to help reassure financial markets that the government and banks can meet their debt payment obligations as the country’s economic and financial crisis becomes more fearsome”.
Here is a perfect example of where European Central Bank support would go a long way toward mitigating any financial contagion. But so far, the ECB remains in “monitoring” mode.
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.
At Pimco (Pacific Investment Management Co), global chief economic adviser Joachim Fels said the US and Europe face the “distinct possibility” of a recession.
Former US Treasury secretary Larry Summers, a paid contributor to Bloomberg News, said the coronavirus may prove to be the most serious crisis of the century so far and has put the odds of a US recession at 80 per cent.
Traditionally more conservative in calling a recession, Wall Street economists are also downgrading their forecasts. Those at Bank of America on Wednesday cut their global growth forecast for 2020 from 2.8 per cent to 2.2 per cent. That is “in spitting range of a typical global recession” and well below the world’s long-term growth trend of 3.5 per cent, they said.
Their counterparts at JPMorgan Chase told clients this week that the risk of a global recession “has risen materially”. To revive their confidence, they said, they need to see a fading of the virus, a stronger and more creative response by economic policymakers, and for companies and banks not to slash jobs or lending. They also argued that the tumble in the cost of oil may not necessarily boost growth as much as historically because consumers will pocket the windfall from cheaper fuel prices.
Policymakers are already struggling to keep up, adding to concern that falling demand will not be cushioned enough by stimulus.
The United States at least has institutional mechanisms in place via the Centers for Disease Control (CDC) and the Federal Emergency Management Agency (Fema) to provide Americans with clear, credible instructions devoid of political spin.
Most Western economies, having largely succumbed to the logic of globalisation, are vulnerable as supply chains wither. Worse, there appears to be a singular lack of understanding on the part of multinational companies as to how far these supply chains go.
When goods are widely dispersed geographically (instead of centred in a localized industrial ecosystem), it is harder for executives to have full knowledge of all of the items in their respective companies’ supply chains, so the deficiencies of the model only become apparent by the time it is too late to rectify.
In the US, specifically, it has evolved from being a nation of industrialists to a nation of financial rentiers. And now the model has exposed the US to significant risk during a time of national crisis, as the coronavirus potentially represents.
The most problematic consequences now evident in the pharmaceutical markets. China or India are beginning to restrict core components of important generic drugs to deal with their own domestic health crisis.
This has the potential to create a major crisis, given that the US “depend(s) on China for 80 per cent of the core components to make our generic medicines”, writes Rosemary Gibson in the American Conservative.
Constraints on production, therefore, intensify as more and more of the manufacturing process pertaining to the drugs themselves is geographically globalized.
We should start by reducing our supply chain vulnerabilities by building into our systems more of what engineers call redundancy — different ways of doing the same things — so as to mitigate undue reliance on foreign suppliers for strategically important industries.
We need comprehensive government-led actions. In other words, the revival of a coherent national industrial policy. Otherwise, the coronavirus will simply represent yet another in a chain of catastrophes for global capitalism, rather than an opportunity to rethink our entire model of economic development.
The US Federal Reserve’s emergency interest rate cut of March 3 failed to buoy investor confidence. There are also calls for it to follow the Bank of England in channelling assistance to parts of the economy in most need.
The European Central Bank (ECB) announced on Thursday what it called a “comprehensive” package that included more quantitative easing and tools to raise liquidity, but it disappointed investors calling for interest rates to be cut.
That leaves fiscal policy, which should be more potent than monetary policy because it can be targeted and delivered in size. But governments are again proving sluggish in getting ahead of the crisis.
While more governments are rolling out stimulus packages and offering more than US$130 billion (S$183 billion) of virus-relief steps, the Trump administration has been slow in crafting a plan after initially questioning the need for one.
In some ways, the virus outbreak’s impact is more worrisome than the financial crisis, as it has hit a multitude of consumer and business channels.
“This is the opposite transition from the crisis propagation perspective – now we have the services sector basically coming to a standstill worldwide” while the financial system still is relatively healthy, said Mr Baig, a former economist at the International Monetary Fund.
While the crisis of 2008-09 was a “classic financial crisis”, this time, “it’s not about fixing banks or putting capital in there – it’s about saying the pandemic has ended. That’s what makes it very uncertain” as the virus has proved so hard to control.
