How much damage will coronavirus wreak on the global economy?
In just a few months Covid-19 has ballooned into a global pandemic, leading governments to close borders and lock down entire cities. Economists have struggled to come up with estimates of the economic damage, but their projections, such as they are, are becoming grimmer.
According to Ethan Harris, head of global economics research at Bank of America, global growth in gross domestic product is set to drop to zero this year, with the US and Europe sinking into a recession and China growing at just 1.6 per cent. At the end of January, Mr Harris’s team had expected the global economy to grow 3.1 per cent and China 5.6 per cent.
Gregory Daco, chief US economist at Oxford Economics, believes the US is already in recession and will experience a 12 per cent contraction in output in the second quarter before bouncing back to end the year flat. Such an outcome could lead to about one million job losses, he said.
“The coronavirus pandemic will lead to profound, pervasive and persistent, but not permanent, reductions in activity,” said Mr Daco.
Policymakers have rushed to limit the worst of the economic pain, with central banks announcing broad-based stimulus programmes and governments committing to multi-trillion-dollar fiscal initiatives.
But given the uncertainty surrounding just how many people will become infected and how long businesses will stay shut, it remains unclear if these measures will be sufficient.
As Michael Feroli, chief US economist at JPMorgan, cautioned in a recent note: “The current environment is one of pervasive ‘Knightian uncertainty’ — that is, an unknown for which we cannot even quantify the odds of various outcomes.” Colby Smith
How quickly can China rebound from its outbreak?
As the pandemic has moved from China to Europe, some analysts have taken heart in apparent progress made by Beijing in containing the virus. But the coming week is unlikely to lend much comfort to investors hoping the worst has already passed.
After a poor performance in 2019, heavy industry in China looks set for its worst start to a year since the global financial crisis. Industrial profits data for January and February, due to be released on Friday, will provide insights into the depth of the nation’s economic gloom.
Industrial output fell by 13.5 per cent in January-February from the same period a year earlier, which was the weakest reading on record. Profits at big industrial firms were already on a downward spiral thanks to the US-China trade war, dropping 6.3 per cent year on year in December, which helped drag profits for Chinese industry during 2019 down 3.3 per cent.
And while industrial profits data may confirm what many reasonably suspect was a terrible start to 2020, more frequently updated data do not provide much to cheer.
The FT’s own China Economic Activity index — a weighted measure of six daily data series tracking the country’s economic recovery — has stalled at about 60 per cent of pre-outbreak levels in recent weeks.
Western investors banking on a quick recovery in Europe and the US may therefore want to think twice about buying the dip based on China’s recovery story. Hudson Lockett
What next for the Bank of England after rate cuts?
Bank of England policymakers were unable to wait until a scheduled meeting this Thursday, instead announcing another interest rate cut last week that took the UK’s key benchmark to 0.1 per cent. However, this week’s meeting could still give some clues to the central bank’s next steps.
RBC Capital Markets strategists say that, for now, the BoE is not likely to attempt to support the economy by pushing rates into negative territory. But, while governor Andrew Bailey has said he is not a fan of negative rates, he has not ruled out the option.
Mr Bailey said last Thursday, a day after offering unlimited support to big companies through a new commercial paper facility, that the situation was “absolutely unprecedented” and that the government bond market was “bordering on disorderly”. Interest rates on gilts were swinging wildly, and the pound appeared to be in freefall, as investors sought to flee UK assets.
Turmoil in financial markets could therefore force the central bank into more unconventional areas, akin to the European Central Bank’s long-running negative rates policy.
On Friday sterling clawed back more than 2 per cent against the dollar but it remained below $1.18, down more than 10 per cent over the previous fortnight.
“Unless markets calm down, $1.10 can no longer be ruled out,” said Petr Krpata, a currency strategist at ING Bank in London. Eva Szalay