World economy faces worst year since ’09 as virus fears grow

The world economy might be heading for its worst performance since the financial crisis more than a decade ago as the spread of the coronavirus increasingly dashes hopes of a swift rebound.

Just weeks since most economists bet the China-led slump would quickly reverse once the virus was contained, many are rethinking that optimism as swathes of Chinese factories stay shut and workers idled. Having already cut supply chains and undermined tourism and trade, outbreaks from Europe to the Americas threaten activity elsewhere, too.

Harris

Bank of America Corp. economists warned clients late last month that they now expect 2.8% global growth this year, the weakest since 2009. They were already penciling in the softest growth in China since 1990, but now say the United States will expand the least in four years.

“The risks are still skewed to the downside,” BofA economists led by Ethan Harris said 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 recently released by the International Monetary Fund on Feb. 22, when it said it would likely knock only 0.1 percentage point from its global growth estimate of 3.3% for this year although it was 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.

On March 1, China reported that its manufacturing activity plunged to an all-time low in February, with the first official data published amid the coronavirus outbreak confirming fears over the impact on the Chinese economy.

The official manufacturing purchasing managers’ index slowed to 35.7, the National Bureau of Statistics said, having slipped to 50.0 in January when the impact of the coronavirus was not yet evident.

China has a long recovery ahead. Bloomberg Economics calculates the economy ran at 60% to 70% of normal in the last week of February, albeit up from 50% to 60% a week earlier.

In a surprise move on March 3, the Federal Reserve cut its benchmark interest rate by a sizable half-percentage point in an effort to support the economy in the face of the spreading coronavirus.

“The Fed obviously cannot address the virus itself by cutting rates, but they can hope to short-circuit the potential for a negative response in financial markets that could make the economic impact of the virus even worse,” said Eric Winograd, senior economist at AB.

Paul Ashworth, chief U.S. economist for Capital Economics, said, “With financial markets in turmoil and evidence growing that the coronavirus is developing into a pandemic, the Fed’s change of heart is entirely understandable.”

Ashworth noted that the Fed’s statement on March 3 repeated language it has used in the past that it would act as appropriate.” He said this may suggest that the Fed is leaning toward an additional rate cut, perhaps as soon as its next scheduled policy meeting in two weeks.

Other governments might also lend a hand. JPMorgan Chase & Co. economists predict China, South Korea and Hong Kong will all ease fiscal policy.

Much ultimately depends on how the virus spreads and what economic pain it causes, 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 Feb. 27 showed underlying demand in the economy was slower than initially reported in that period.

A 2007 World Bank study estimated the cost of a mild flu pandemic at 0.7% of global gross domestic product, and 4.8% 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,” Tom Orlik, chief economist at Bloomberg Economics, wrote in a note.•

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