500-words Analysis on Covid-19’s Impact on the Global Economy
At the time of writing (27th March), the coronavirus has spread through all continents, except for Antarctica. Italy is the worst-hit with official death count at 8,215 and 80,589 confirmed cases. The United States has the highest number of cases at 85,435, with an unsettling rate of increase. China has effectively stopped the virus from spreading, returning back to nolmacy.
United States:
The FED slashed interest rates to 0 at the lower bound and committed to “unlimited quantitative easing” while the White House passed a coronavirus economic-relief plan valued at $2 trillion that will provide some support for the economy. The situation in the U.S. will likely further decline with President Trump consistently downplaying the impact of the virus. Most immediately, U.S. jobless claims should spike above 400,000 this month. The S&P500 has declined 34% with investors seeking for risk-off assets such as gold, the greenback and bonds. On the presidential election, Covid-19 could be the deal-breaker for Trump’s re-election.
Europe:
Europe is worst hit by the coronavirus with major economies in lockdown. Flash PMI has indicated that Germany, France and UK’s PMI have tumbled to 42.2, 35.6 and 43.3 respectively. As the top travel destination in the world, the sudden stop of tourism in Europe has substantial impacts. A European recession would appear inevitable. With ECB and BoE interest rates already at -0.5% and 0.1% respectively and with limited fiscal stimulus capacity, European countries may have limited firepower to support their economy. Strong trade unions would however prevent unemployment rate from climbing indefinitely.
Asia:
China’s PMI slumps in February to a record low of 35.7, signalling an unprecedented contraction. The economy could shrink by 5–9 % in the first quarter. As the Covid-19 situation in China improves, the economy is returning to normalcy. The RMB likely to remain weak as the rest of the world continues to battle Covid-19. For Singapore, historical trend suggest that the economy will tag along with the global economy. Overall, the situation in Asia has improved, except for a few countries such as Malaysia and Thailand. Asia will likely bounce back stronger than other regions.
Global Recesion:
A global recession and a rise in unemployment in the first quarter is a very likely scenario despite large expansionary monetary and fiscal policies and increased liquidity around the world. Demand has plummeted with notable hits to travel and service. Some industries such as Airline requires state intervention while some other sectors such as gaming and online services have greater resilience. Global deflationary pressure would remain strong due to low oil prices and weak demand. The rout in the risk-on-asset markets will persist until there is certainty that Covid-19 is contained. At the aftermath, recovery will be slow given substantial supply-side impact.
Travel is largely restricted.
Corporate Debt Bubble:
The greatest downside risk for the global economy is the corporate debt bubble, accumulated over the past decade, largely due to the low interest rate environment. As Covid-19 continues to disrupt business operations and consumer behaviours, a persistent enough cash-flow shock could cause many companies, especially for those with credit rated at junk, to face refinancing issues, potentially spiralling the global economy into a financial crisis.
Covid-19 will likely to continue for some time and cause severe disruption to the global economy, along with significant aforementioned downside risk if the virus persists.
