World Faces Global Recession Amidst Pandemic

After its first emergence in the city of Wuhan, China last December, the virus COVID-19 has wreaked havoc globally, infecting more than one hundred thousand people and killing more than four thousand people, with no signs of stopping as governments around the world try to contain the epidemic. Global fear surrounding the outbreak has hurt investor sentiments significantly, with signs showing a potential of a new global recession in 2020. “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,” Ben May, head of global macro research at Oxford Economics, said in a report this week. Several key indicators show the terrible impact the virus has had on the capital market and global economy.

OECD has cut back on its prediction on global GDP growth from 2,9% to 2,4% in 2020. Meanwhile, the largest economy in the world, China, is effectively paralyzed for the time being, with its manufacturing and services sectors as the ones hardest hit by the epidemic. The Caixit manufacturing and services Purchasing Manager Index shows that economic activity from both sectors has plunged more than 40%. Such contraction has led to a domino chain effect to economies closely linked to China – Asia Pacific countries, Japan, and the United States – weakening their respective economic performance. Another indicator is the global demand for commodities. Since the epidemic began, demand for any raw material imaginable has dropped, implicating a slowdown of economic spending. One important material, oil, has experienced plummeting prices to a level of US$33,36 per barrel, stoking an oil price war between OPEC countries, especially considering that China is the largest crude oil importer in the world. In other words, the world is experiencing a rare case of both a supply and demand shock; a recipe for a disastrous recession, especially since the virus has not been entirely contained and no vaccines have been invented.

Lastly, indicators from the financial market show a ramp-up in investor fears. US Treasury bond yields fell below 1% for the month, showing an increase in demand for bonds as a safe haven for investors. Strikingly, Japan bond yields are now in the negatives. Capital markets around the world have also experienced an unprecedented drop in market value. The JCI Composite dropped to 4.950, its lowest ever in three years. Japan’s Nikkei 445, Hong Kong’s Hang Seng Index, USA’s DOW and S&P 500, China’s Shanghai Composite, all entered the bear market on Thursday (12/3), with the majority dropping 10%. A textbook solution to halt the crises has been to continually cut interest rates as central banks have done during the week; however, financial and economic implications all point out to a bleak 2020 unless a solution to the COVID pandemic has been found.

Sources:

CNBC

Vox

CNN