Growing threat of global recession from Covid-19
Among the steps being taken last week, the US Federal Reserve announced that it would slash interest rates by half a percentage point. Meanwhile, the Bank of England is drafting an action plan to deliver a “powerful and timely” response to the coronavirus outbreak, and Australia signals it may resort to quantitative easing.
The outbreak is developing and evolving quickly, and no one accurately can predict what the economic fallout will be.
However, I believe that based on what we know, the risk of a coronavirus-driven short, sharp global recession this year is significantly growing.
The epidemic has already dented anaemic global economic growth this year, and it can be expected to slow further, then contract as the fear of the virus takes hold.
The outbreak has sent the stock market into bouts of volatility not seen since the 2008 financial crisis, severely disrupted global supply chains, shuttered factories, grounded flights, closed attractions and cancelled major events.
Entire powerhouse cities in Asia and Europe are nearly shut down. Multinational companies have warned that the coronavirus will severely hit profits. Workers are being evacuated and forced to work from home and to avoid travelling.
We can see that both supply and consumer demand are being impacted in key sectors, such as travel and tourism, hospitality, manufacturing and retail, and it is going to extend to others. This scenario is likely to feed on itself: a lack of consumer confidence and spending, lack of business investment, more job cuts, which means even less spending and demand, which leads to further job cuts.
Companies already on the edge are likely to fold.
Against this backdrop, we should prepare for a short but severe global recession. However, the world economy is likely to bounce back strongly. We could even see revived global growth as economies rebuild and adapt, and particularly so if central banks and governments step in to kick-start growth.
The short-term economic impact of the coronavirus is likely to affect capital markets which, in turn, affects investors’ returns. It has shifted the landscape. Investors are urged to review their portfolios to ensure that they are still on track to create, build and generate wealth.
Nigel Green is the chief executive and founder of deVere Group.