10 Implications of Covid-19 for the Global Market Economy

1.What would a Covide-19-induced recession look like?

While the market sentiment may be misleading, the risk of recession is real. The vulnerability of major economies, including the United States economy, has risen as economic growth has slowed and the capacity of national economic expansions to absorb shocks has declined. In fact, exogenous shocks to the U.S. economy at a time of fragility are the most plausible recession scenario for some time.

2. recessions are usually divided into three categories :

(1). True Recessions Classically, this is a CapEx boom cycle that turns bankrupt and derails expansion. 

But severe exogenous demand and supply shocks – such as wars, disasters, or other disruptions – can also push the real economy into contraction. It is here that Covidien-19 has the best chance of infecting its host.

(2). Policy Recession. 

When central banks let policy rates go too high relative to the economy’s “neutral” rate, they can tighten financial conditions and credit intermediation and, with a lag, stifle economic expansion. This risk remains modest – outside the US, rates are already rock-bottom or even negative, while the Fed has surprisingly cut them by 50 basis points. Beyond the monetary policy response, G7 finance ministers have pledged fiscal support.

(3). Financial crises.

Financial imbalances tend to build up slowly over a long period of time and then lift off quickly, disrupting financial intermediation and then the real economy. There are some notable differences globally, yet in the United States, a key economy, the risk of a financial crisis is hard to point to. Some commentators point to the bubble in corporate credit, as evidenced by the massive issuance and tight spreads. Yet it is difficult to use the subprime analogy to the last recession because corporate credit neither financed the boom in the real economy (as subprime loans did with mortgages) nor was it debt on bank balance sheets. Both of these factors limit the systemic risk of potential credit turmoil, though the risk cannot be dismissed entirely. It’s hard to see Covid-19 causing financial imbalances, but tight cash flows could cause stress, especially in small and medium-sized businesses.

3. 10 Implications of Covid-19 for the Global Market Economy

Ben May, head of global macro research at the Oxford Economics Institute, said in a report, “From an economic perspective, the key issue is not only the number of cases of COVID-19 but also the extent to which containment measures are damaging the economy.” Chow.

“Widespread blockades like the one in China are already in place in certain virus hotspots,” he said, adding that such measures could trigger panic and further weaken the global economy if inappropriate measures are taken.

Concerns about the impact of the coronavirus on the global economy have rocked global markets, with stock prices and bond yields plummeting.

Below are six charts showing the impact of the epidemic on the global economy and markets so far.

1) Impact on the economy.

① Downgrading of economic forecasts

The outbreak led major institutions and banks to lower their forecasts for the global economy. The Organization for Economic Cooperation and Development is one of the latest to do so.

In a March report, the OECD said it had lowered its 2020 growth forecast for almost all economies.

The report said that in terms of gross domestic product (GDP) growth, the decline was the largest. The Asian economic giant is expected to grow by 4.9 percent this year, down from an earlier forecast of 5.7 percent, the OECD said.

At the same time, the global economy is expected to grow by 2.4% in 2020, down from an earlier forecast of 2.9%, the report said.

② Risk of recession.

If the economy is growing, that usually means more wealth and more new jobs.

It’s measured by looking at the percentage change in the gross domestic product (GDP) or the value of goods and services produced (usually over a three-month or one-year period).

But the International Monetary Fund says the global economy will shrink by 3 percent this year. It described the recession as the worst since the Great Depression of the 1930s.

While it says the coronavirus has plunged the world into an “unparalleled crisis”, it does expect global growth to reach 5.8 percent next year if the pandemic subsides in the second half of 2020.

This will be driven largely by growth in countries such as India and China.

The recovery of large, service-dependent economies that have been hard hit by the epidemic, such as the United Kingdom or Italy, is expected to be a slow process.

(2) Slowdown in manufacturing activities

The outbreak of the virus has hit China’s manufacturing sector hard.

The Caixin/Magit Manufacturing Purchasing Managers Index, a survey of private companies, showed that factory activity in China contracted in February to a record 40.3 points. A reading below 50 indicates contraction.

This slowdown in China’s manufacturing sector is hurting countries with strong economic ties to China, many of which are Asia-Pacific economies such as Vietnam, Singapore and South Korea.  

Several analysts said it is taking longer than expected for Chinese factories to resume operations. That, along with the rapid spread of COVID-19 outside of China, means global manufacturing activity is likely to continue to weaken, economists said.

(3) Services contraction

A viral outbreak in China has also hit the country’s services sector as reduced consumer spending hurts retail stores, restaurants and airlines.  

In February, China’s Caixin / Markit Services PMI was just 26.5, the first time it had fallen below 50 points since the survey began 15 years ago.

China wasn’t the only country whose services sector weakened. The service sector in the United States, the world’s largest consumer market, also contracted in February, according to IHS Markit, which compiles monthly PMI data.

IHS Markit said that one of the reasons for the contraction in the U.S. service sector was “a reduction in new business from abroad as customers declined to place orders during a period of global economic uncertainty and a coronavirus outbreak”.

(4) Lower oil prices

The reduction in global economic activity has reduced demand for oil, sending prices to multi-year lows. This happened even before a consensus between OPEC and its allies on production cuts led to the latest plunge in oil prices.

Singapore bank DBS (DBS) analysts said, due to the virus outbreak and lead to a reduction in oil demand, as well as supply is expected to increase, which is a “double blow” to the oil market.

China, the epicenter of the coronavirus outbreak, is the world’s largest importer of crude oil.

DBS analysts wrote in a report that “the spread of the virus in Italy and the rest of Europe is particularly worrisome and could also dampen demand from OECD countries.”

(5) The stock market rout

Concerns about the impact of COVID-19 on the global economy have already hurt investor sentiment and depressed stock prices in major markets.

Cedric Chehab, head of the country risk and global strategy at Fitch Solutions, says there are three ways a coronavirus outbreak can work its way through market sentiment.

He told CNBC’s “Asia Roadshow”: “We have identified three channels through which a COVID-19 outbreak will put pressure on the market, and that is a slowdown in China, a slowdown in the domestic outbreak …… and a third one. The channel is the pressure on the financial markets.” This week.

(6) Lower bond yields

Concerns about the global spread of a new coronavirus have also driven investors to raise bond prices, leading to lower yields in major economies. United States Treasury bonds, backed by the United States Government, are considered safe-haven assets and investors tend to flee them in times of market turmoil and uncertainty.

In an unprecedented development, yields on all U.S. Treasury contracts have fallen below 1 percent over the past week. The benchmark 10-year contract has also touched an all-time low of around 0.3%. 

Several analysts said such compression in U.S. Treasury yields could prompt the Federal Reserve to cut interest rates again. After the U.S. central bank made an emergency cut last week of 50 basis points to its target funds rate to 1 percent to 1.25 percent.

Strategists at Bank of Singapore said: “We believe the Fed realizes that there is limited room for a conventional rate cut today compared to past recessions and will look to move more aggressively beyond market expectations to get the most out of the rate cut.”

(7). Global flux share declines

Significant changes in the stock market for buying and selling company shares could affect the value of pensions or individual savings accounts (ISAs).

The FTSE, Dow Jones Industrial Average and Nikkei have all fallen sharply as the number of Covid-19 cases has increased.

Since 1987, the Dow and FTSE have seen the largest quarterly declines in the first three months of the year.

In response, central banks in many countries, including the UK, have lowered interest rates. In theory, this should make borrowing cheaper and encourage spending to stimulate the economy.

Global markets have since resumed some development as governments have intervened. But some analysts warn that they could be in turmoil unless fears of second pandemic ease.

(8) More and more people are looking for work

As a result of the coronavirus crisis, many people lost their jobs or their incomes.

As a result, unemployment has risen in major economies.

In the United States, according to the International Monetary Fund (IMF), the share of the population unemployed has reached 10.4%, marking the end of a decade of expansion in one of the world’s largest economies.

Millions of workers have also embraced government-backed job retention programs as parts of the economy (such as tourism or hospitality) have come to a standstill due to the embargo.

However, the data varies between countries. France, Germany and Italy, for example, provided figures on applications, while Britain counted workers currently on the scheme.

Since then, however, there have been signs of recovery in the global job market.

According to the social media platform LinkedIn, for example, hiring rates in China and France have increased as the closures have eased.

Some experts warn, however, that employment levels may not recover until a few years before the pandemic.

(9). Impact on the aviation industry.

Tourism has been severely disrupted as airlines have cut flights and customers have canceled business trips and holidays.

Many countries have introduced travel restrictions in an attempt to curb the virus.

Data from flight-tracking service Flight Radar 24 shows that global flight numbers were hit hard in 2020.

But the industry has begun to open up as the spread of the infection has eased in some areas.

Spain, for example, has reopened its borders to visitors from much of Europe without the need for quarantine. For months, it was one of the toughest blockades in Europe.

Travel companies also said that bookings in the UK had “exploded” after the government announced it would ease current restrictions.

Retail traffic also hit an unprecedented low as shoppers stayed home to stop the spread of Covid-19.

The number of pedestrians has since risen as the lockdown has been lifted, research firm ShopperTrak said.

Separate research suggests that consumers may still be anxious about returning to the shops.

A survey of more than 1,000 people by accountancy giant Ernst & Young (EY) revealed that more than half of UK customers expect they will now shop less frequently in the next year or two.

(10). Urgent need for vaccines

Governments around the world have committed billions of dollars to Covid-19 vaccines and treatment options.

Many pharmaceutical companies are scrambling to develop and test potential drugs that could help countries return to “normalcy”.

Shares of some companies have soared on the hope that some will be approved and released on a large scale.

AstraZeneca’s stock, for example, is at an all-time high. The drug company says it will be able to produce 2 billion doses of the vaccine.

The International Monetary Fund said of a pandemic that would devastate the global economy: “No country is safe until this medical intervention is made available.”

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