The coronavirus brought the market down and contributed to the stock market crash of 2020, and could end up costing the global economy $2.7 trillion. Here’s how:
The Coronavirus Stock Crash Stunts Growth
Global growth is expected to slow to 1.5% in the first quarter, but the trajectory is expected go into a partial recovery in the second quarter, and accelerate at year-end.
This trajectory also puts global growth at 2.6%. Before coronavirus, the forecast was 3.3%.
Brent crude oil declined from almost $60 a barrel in late February to $37 in early March.
An additional negative impact on the economy, because cheaper oil has no benefit when everyone is under coronavirus lockdown. These low prices should buoy recovery once the coronavirus has passed.
The Global Nature of Coronavirus Could Bring the World Economy to a Standstill
The epidemic that started in China spread rapidly throughout the world, resulting in possible recessions in the U.S., the Euro-area and Japan, with record slow growth in China.
This is the most extreme economic scenario, and draws on what China experienced, how the cases were distributed in other countries, risk estimates to global supply chains and a large-scale model of the global economy.
There are many unknowns, like how the epidemic will progress and the responses of government and business to that progress.
What China Experienced
Automobile sales decreased 80%, and passenger traffic is 85% less than normal levels. The economy is not moving, and the GDP growth was the weakest on record.
This matters because China is both a source of demand and a source of supply. The world needs China’s manufactured components and when they are not available, it trickles down to even small businesses.
What happens in China spreads across global financial markets and affects household wealth and business confidence.
If it is possible for China to get the outbreak under control and start producing again for the second quarter, then their economic impact may be contained.
A platform that connects Chinese suppliers and global buyers found that 80% of manufacturing firms had resumed operations by late February, with hopes that production capacity could be back to normal by late April.
There may be some recovery, but even with the factories being up and running, there is not enough inventory.
Worst Case Scenario
If the global pandemic causes all countries to have a growth drop like China, the global growth for the year would go to zero.
Even the U.S. economy would contract, which is likely to affect the presidential election and China’s economy would only expand 3.5%, the slowest since 1980, and the lost output worldwide would be $2.7 trillion.
The Federal Reserve Response
Rate cuts and extra public spending were used for sustainable growth while avoiding downside risks.
The Federal Reserve lowered rates by 50 basis points, while the People’s Bank of China was cautious and lowered rates by 10 basis points, instructing lenders to refrain from calling in bad loans.
The world is waiting to see how this pandemic will play out.