Coronavirus: How deep will the new recession be?

Dubai: The coronavirus outbreak and its economic impact threatens to plunge the global economy into recession if the uncertainty continues beyond the second quarter.

At economic powerhouse China, where the COVID-19 originated earlier this year, early indications of the impact on the economy are worse than initially forecast. “Surveys of China’s manufacturing and services sector plunged to record lows in February; automobile sales sank a record 80 per cent; and China’s exports fell 17.2 per cent in January and February,” according to a report by Center for Strategic and International Studies (CSIS).

The report indicates that China’s growth is poised to drop in the first quarter - the first contraction since China began reporting quarterly data in 1992. It has “a strong impact on the world economy; if things continue as such, there will be a substantial slow [growth]. And this is bad news for the entire world,” Ben May, Director of Global Macro Research at Oxford Economics told “Gulf News” from London.

He cautioned against jumping into recession predictions at this point, but said there is a sharp decline in the global economy this quarter. “The second quarter will be worse than the first as the uncertainty continues,” he added.

If the coronavirus continues to spread to more areas outside its China epicenter and “with a surge in bad news”, it might push the global economy towards recession, the firm said in a report this week.

Driven by more bad news

“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,” the report said. “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.”

This was a reference to the lockdown of towns and even an entire country like Italy, travel disruptions, event cancellations and quarantine measures taken by many countries to contain the spread.

“It is isolation policies not infection rates that determine the economic impact,” said the Oxford Economics report. “Outbreaks around the world are leading authorities to announce a growing list of measures to curb the virus spread. At a global level, any Q2-2020 rebound will thus be small at best.

“We expect investment in the advanced economies as a whole to contract on a year-on-year basis in Q2-2020 for the first time since the [2008] global financial crisis, while annual household spending growth may slow to its lowest since the [2010] eurozone crisis.”

Then there’s oil

On top of the Coronavirus fallout, on Monday oil prices saw its sharpest decline in 30 years - a 30 per cent drop - following the failure of Opec and Russia to agree on further production cuts to counter diminished demand. A price war between Russia and Saudi Arabia followed, which plunged Brent crude to the mid-$30s a barrel.

The coronavirus and the oil price war have made a global recession in 2020 increasingly inevitable, says Nigel Green, Chief Executive and founder of deVere, one of the largest independent financial advisory firms.

“Oil’s sharpest one-day drop since the 1991 Gulf war has further fuelled the sell-off in global stock markets that started a couple of weeks ago on fears that coronavirus is going to severely damage economic growth,” he said in a note posted on the company’s website, adding the oil price war will “have far reaching consequences”.

“With the combination of the implications of the oil stand-off and the outbreak, I now believe that it’s almost inevitable that there will be a global recession this year.”

Markets in tizzy

He notes that the virus outbreak has already sent the global stock markets into bouts of volatility not seen since 2008, severely disrupted global supply chains, shuttered factories, grounded flights, closed attractions and cancelled major events. Entire powerhouse cities in Asia and Europe are nearly shut down.

Multinationals have warned the virus fallout will severely hit profits. Workers are being evacuated and forced to work from home and to avoid travelling.

“The ultimate impact the oil price war will have on an already vulnerable world economy that’s struggling to cope with the spread of coronavirus remains unknown,” Green said. “However, the risk of a short but severe global recession in 2020 has now heightened dramatically.”

As governments around the world scramble to come up with urgent remedies, such as rate cuts and financial stimulus, May says that might not be enough, especially if more draconian measures are taken by countries.

“Since January, we have cut our 2020 global GDP growth forecast by a hefty 0.5 per cent,” May said. “But larger revisions may be required if the disruption triggered by shutdowns and other responses to coronavirus proves longer than we assume currently.

“Or if more draconian actions are needed in the event of a global pandemic. Our scenarios suggest that the latter could push the global economy into a deep recession.”