LONDON – The world economy may be heading for its worst performance since the financial crisis, more than a decade ago, as the spread of new virus that causes COVID-19 increasingly dashes hopes of a swift rebound.
A few weeks ago most economists bet the China-led slump would quickly reverse once the virus was contained, but many are now rethinking that optimism as swaths of Chinese factories remain shut and workers idle. Having already severed supply chains and undermined tourism and trade, outbreaks from Europe to the Americas threaten activity elsewhere too.
Bank of America Corp. economists warned clients Thursday that they now expect 2.8 percent global growth this year, the weakest since 2009. They were already penciling in the softest growth in China since 1990, but now say the U.S. will expand the least in four years.
“The risks are still skewed to the downside,” wrote economists led by Ethan Harris in a report. “Our forecasts do not include a global pandemic that would basically shut down economic activity in many major cities.”
The outlook contrasts with that released by the International Monetary Fund just last Saturday, when it said it would likely knock only 0.1 percentage point from its global growth estimate of 3.3 percent for this year even though it was also studying more “dire” scenarios. Now the Washington-based fund is reconsidering the scale and scope of policy meetings it was scheduled to host in mid-April.
As stocks plunge, companies are also sounding the alert. Standard Chartered PLC on Thursday joined HSBC Holdings PLC in saying it would miss profit targets because of the virus.
“We remain sensitive to external conditions generally and recognize that these could as easily recover as worsen,” Chief Executive Officer Bill Winters said.
China still has a long recovery ahead. Bloomberg Economics calculates that its economy ran at 60 percent to 70 percent of normal this week, albeit up from 50 percent to 60 percent a week ago.
For now, key central banks are holding off cutting interest rates as they wait to see the full economic effect of the virus, with rates already at or near record lows.
But economists are beginning to join investors in predicting that the major central banks will eventually loosen policy. Those at Standard Chartered told clients Wednesday that they now expect the Fed to cut its benchmark rate in April and June, having previously assumed no change this year.
Money markets already see three Fed reductions this fiscal year, which starts in April, and one by the ECB by October. In an opinion piece in the Wall Street Journal on Thursday, former Fed Gov. Kevin Warsh went as far as to suggest the Fed coordinate rate cuts with its counterparts in China, Europe and Japan.
“With global virus and related economic developments continuing to shift the baseline from a V-shaped to a U-shaped impact on activity with persistent impacts on both supply chains and global consumer demand we now update our base case to one in which the Fed will ease policy in response to the virus shock, and likely sooner rather than later,” wrote Krishna Guha, vice chairman at Evercore ISI in Washington, in a note.
Much depends on how the virus spreads and what economic pain it causes, potentially reversing gains economists had hoped for after the interim U.S.-China trade deal. The economies of Japan, Italy and France already contracted in the fourth quarter, while U.S. government data on Thursday showed underlying demand in its own economy was slower than had initially been reported in that period.
A 2007 World Bank study estimated the cost of a mild flu pandemic at 0.7 percent of global gross domestic product, and 4.8 percent for a severe outbreak.
In 2020 money, that’s between $630 billion and $4.3 trillion — or, to put it another way, between painful but manageable and global recession, wrote Tom Orlik, chief economist at Bloomberg Economics, in a note.
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