News

Coronavirus Could Spark a Global Recession

11/03/2020    22

As the outbreak worsens, experts are increasingly worried about an economic downturn.

THE CORONAVIRUS outbreak and the economic fallout it has sparked could plunge the economy into a recession, experts say. Confidence is waning that the U.S. economy – in the midst of a historic run of expansion dating back more than a decade – will be able to withstand the complex headwinds generated by the virus

However, few predict a recession is an absolute certainty. As Moody's Analytics chief economist Mark Zandi noted during an appearance on CNBC on Monday, much depends on what sort of fiscally stimulative legislation the White House and members of Congress can cobble together in the days and weeks ahead. Trump on Tuesday afternoon is expected to tease what he has described as a "very dramatic" plan to support the U.S. economy.

But as infection counts continue to grow and businesses report widespread disruptions – from supply shortages to mandatory remote work to reduced travel and foot traffic – the economy's prospects appear to be getting grimmer by the day.

Zandi said on Monday he believes there is a 60% to 65% chance that the U.S. falls into recession – up from an even 50% just a few days prior.

"Just take a look at what's going on in China. It's a pretty good case study. It's going to take awhile before people feel comfortable to come out and get back to work and do all the things that they do," he said, saying it is "more likely than not" that the economy snaps its run of record growth in the months ahead.

Zandi's recession probability sits at the higher end of the spectrum – though he is not alone in fearing the worst. Scott Anderson, executive vice president and chief economist at Bank of the West Economics, shifted his recession odds last week up to 50%. Researchers at Oxford Economics boosted their perceived recession probability from 25% to 35%.

Nigel Green, chief executive and founder of the deVere Group, wrote in a research note on Monday that he believes it is "almost inevitable that there will be a global recession this year" as profits plummet, governments restrict domestic and international travel and investment markets panic.

Though the U.S. economy stands on stronger footing than many of its international counterparts, a global recession – potentially exacerbated by a prolonged oil price standoff that on Monday sparked Wall Street's steepest selloff since the financial crisis – would be a significant impediment to continued U.S. expansion.

"A global recession may not yet be an inevitable consequence of the coronavirus outbreak, but even a modest surge in bad news could make it our baseline view," a team of Oxford Economics analysts wrote in a note on Monday. "From an economic perspective, the key issue is not just the number of cases of COVID-19, but the level of disruption to economies from containment measures."

Virus containment depends largely on social isolation, so it is difficult for world leaders to stem the spread of the disease without taking a tangible chunk out of their respective economy's economic growth. The Federal Reserve last week slashed its benchmark interest rate, and reports have surfaced that President Donald Trump's administration is considering temporary payroll tax cut measures to help prop up businesses and support sentiment on Wall Street.

But neither effort does much to stem the spread of the virus. The quarantine and social isolation strategies adopted throughout the rest of the world seem to have helped control the spread of the disease – but these measures essentially maximize economic disruption.

It is not an enviable situation to be in for a Trump administration that has hitched so much of its success to economic momentum. To reduce the spread of the disease, the administration may need to temporarily hurt its favored barometer of success.

"Faced with resource constraints in health care systems, there are strong incentives to take aggressive containment measures to slow the spreading. The impact on economic activity will likely be sharp – and could be deep," analysts at BlackRock Investment Institute wrote in a research note on Tuesday.

Treasury Secretary Steven Mnuchin is expected to meet with Republican lawmakers on Tuesday to discuss legislative options. Trump would theoretically be able to enact some economic support policies through executive order, but it's widely expected the administration will need legislative help from Congress to enact tax adjustments.

But lawmakers and the administration are hamstrung in part by the fact that the U.S. is running trillion-dollar deficits and already received a tax overhaul as recently as 2017. With the Fed's interest rate likewise not particularly high, based on historical standards, fiscal and monetary policy in the U.S. can only do so much.

"Emergencies like this are an example of why the country needs to be on sounder fiscal ground," the Committee for a Responsible Federal Budget said in a statement, responding to an $8 billion emergency funding bill that lawmakers signed off on last week. "Getting our fiscal house in order would help better prepare the country to respond to future urgent matters as they arise."

Should a recession arise, analysts believe it will likely be short-lived, given its primary driver will be quarantine measures for an outbreak that health experts are hopeful will be brought under control in the next few months. Experts are split on whether the economy will bounce back resoundingly or slowly return to normal, but coronavirus impact is widely expected to be temporary.

"However, the longer the virus sticks around, the higher probability it will affect demand and cast a shadow over long-term economic outlook," Daniel Seiler, head of multi asset at Vontobel Asset Management, wrote in a note on Monday. "If the infection rate in China is any guide, we will know more in a few weeks' time if (the virus) will be the much-dreaded factor that pushes the world into a full-fledged recession."

Source: U.S. News

More stories