InternationalVOLUME 15 ISSUE # 15

Coronavirus and global economy

According to a survey conducted by the Organisation for Economic Cooperation and Development (OECD), the global economy could grow at its slowest rate since 2009 this year due to the coronavirus outbreak. The European think tank has forecast growth of just 2.4% in 2020, down from 2.9% in November. But if the outbreak continues and gets more intensive, the growth rate could further decline to 1.5%. The OECD’s warning came after the Bank of England vowed to help stabilise markets, which suffered steep losses over the last two weeks.

The OECD forecast further said that the global economy could recover to 3.3% growth in 2021, assuming the epidemic peaked in China in the first quarter of this year and other outbreaks proved mild and contained. But it said the picture would be much worse if the virus spread throughout Asia, Europe and North America. Laurence Boone, the OECD’s chief economist, in his comment said: “The main message from this downside scenario is that it would put many countries into a recession, which is why we are urging measures to be taken in the affected areas as quickly as possible.”

Media reports from around the world show that coronavirus is already forcing businesses to suspend operations everywhere – in China and elsewhere as officials try to contain its spread. The previous weeks saw major stock markets suffer their worst weekly performance since the 2008 financial crisis, with $1.5 trillion being wiped off the value of global shares. In view of this, investors hope that central banks around the world will work in unison to support financial markets as the deadly virus spreads to more countries.

In this context, the lead has been taken by the Bank of England which continues to monitor developments around the world and is assessing its potential impact on the global and UK economies and financial systems. The bank is said to be working closely with domestic financial authorities as well as international agencies to ensure that all necessary steps are taken to protect financial and monetary stability.

Other central banks are also up and active. Japan’s central bank and the US Federal Reserve have also prepared plans to intervene to stop more big falls on global stock markets. Encouraged by the news, London’s FTSE 100 index soared almost 3% in early trading last week, while stocks in Pakistan also recovered by a big margin in the first week of March. Other Asian markets too closed higher, with China’s Shanghai Composite index gaining 3.2% and Japan’s benchmark index, the Nikkei 225, ending the week 1% higher.

Weeks ago, senior officials in President Donald Trump’s administration tried to address concerns about the impact of the outbreak, highlighting the US economy’s underlying strength. US Vice-President Mike Pence, who is leading the administration’s response to the coronavirus, said that the stock market “will come back”, adding that “the fundamentals of the economy are strong”.

On the negative side, the privately-run Caixin/Markit Manufacturing Purchasing Managers’ Index showed the fastest rate of contraction in China’s factory activity since the survey was launched in 2004. It followed the release earlier of equally weak official numbers. Both sets of data came after employers across the country were ordered to remain closed after the annual Chinese New Year holiday as part of attempts by authorities to stop the spread of the virus.

The decline, which was even worse than the slump seen during the 2008 global financial crisis, highlighted the outbreak’s huge impact on the world’s second-largest economy. However, there are limits to what traditional monetary policy can actually achieve if the coronavirus outbreak continues to spread.

Needless to say, if the supply chains are disrupted, and factories have to shut down, interest rate cuts are unlikely to help very much. Likewise, if people don’t want to go to the shops, eat in restaurants, travel on planes or stay in hotels, cheap credit isn’t going to make a lot of difference. And in many countries, interest rates are in any case already low.

But the prospect of a rate cut does at least provide a psychological morale booster and reduces the risk of the falls on the markets turning into a rout. The next step may be to look at ways of encouraging commercial banks to provide targeted support – for companies that are struggling with repayments on loans because their business has been affected by the outbreak.

It is clear that this may be the kind of life-support that’s really needed to keep firms operating until the worst of the crisis is over. The OECD has advised governments to step in if the virus worsened, providing extra support for their health systems and emergency loans for hard-hit industries. According to experts, there is a need for a coordinated G20 response, including health, fiscal and monetary policy measures. It would not only send a strong confidence message but also enhance the effect of individual national actions.