The Coronavirus Will Push Economies Into “Recession 2020”

After it was first reported in Wuhan, China on December 2019, there are now over 114,500 confirmed cases of the disease. The death toll has also gone over 4,000. Aside from the coronavirus being highly contagious and deadly, it also has a shroud of uncertainty. Initially, it was reported that the infection spread through physical transmission. Lately, there have been more cases of community spread where the source of the coronavirus is unknown; it surfaces without any contact with an infected individual.

How Has the Coronavirus Affected the World?

Consequently, the outbreak has affected the daily lives of billions of people. A handful of cities are on lockdown. The Italian government went as far as to put the whole country in lockdown as it surpassed South Korea with the most number of cases next to China at 9,172. School and work are suspended across the world. There are travel restrictions to cities and countries.

These disruptions have also translated to tangible and dire consequences to businesses. Flybe, the UK’s largest regional airline was declared insolvent amid lower demand for air travel. A few airlines globally are also in trouble and are drastically cutting costs to avoid the same fate. Smartphone manufacturers cannot deliver their products since most factories in China are still closed. There have been shortages of drugs, face masks, and even toilet paper as public panic intensifies.

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Recession 2020 on the Horizon

With this, the Organization for Economic Cooperation and Development (OECD), has forecasted that the coronavirus outbreak would take away half a percent in global growth. The worst case scenario is for growth to be cut in half. It would seem that with the drastic sell-off we saw across the financial markets this Monday, investors are preparing for the worst. That is, recession 2020.

A recession is technically defined as two quarters of back-to-back negative growth. Japan, Germany, Italy, South Korea, and even the United States are predicted to find themselves in this rut.

What can be done?

One option is to ease monetary policy. This is what we have seen the Federal Reserve, RBA, BOC, and HKMA do in the past couple of weeks. This means that central banks increase the available money supply in the economy through lower interest rates or purchasing government bonds. Hong Kong even went as far as to give out cold hard cash to its residents.

The other alternative is by fiscal policy wherein a government works with its budget to spur growth. An example would be US President Donald Trump’s plan to impose a tax cut to give consumers more money to spend on the economy. Meanwhile, Japan announced that it would spend 1.6 trillion JPY in corporate financing to assist businesses hit by the coronavirus.

Will They Work?

However, the challenge for policymakers now is that they have far less ammunition than they did in 2008. Back then, interest levels were high. Rate cuts were felt and they achieved their intended consequences. Nowadays, they are at their record lows with Japan, Switzerland, and the euro zone even in negative territory.

Instead of working on their own, governments will need to coordinate with each other because our highly-globalized world has made our economies deeply interconnected. The Federal Reserve’s rate cut will have very little to no effect on an American business whose manufacturing site is situated in China.

The silver lining is that when the coronavirus is contained, economies will soon get back on track to recovery. But the big question is when will it be contained? If the outbreak lasts significantly longer than it already has, there could be irrevocable consequences. How will our world look then?

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