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Economists Slash Global Growth Forecasts as Coronavirus Spreads Global Economic Policymakers Scramble as Coronavirus Threatens Growth
(about 7 hours later)
Analysts around the world slashed their 2020 economic forecasts as the coronavirus continued to spread beyond China and weak Asian data offered an early hint at the infection’s cost to business. Global policymakers moved to ease public anxiety over the coming economic hit from the coronavirus on Monday, as analysts warned of a severe slowdown in growth and a possible recession if the virus continued to spread.
One major multinational group warned global growth could be cut in half if the infection spreads widely. Finance ministers and central bankers from the world’s advanced economies said the Group of 7 would hold an emergency call on Tuesday morning to discuss economic responses to the outbreak. The World Bank and International Monetary Fund signaled they were also ready to provide assistance, particularly to poor nations. Monetary policymakers from Japan to Europe on Monday pledged to act as needed to stem any economic fallout as infections spread.
The Organization for Economic Cooperation and Development said that if the outbreak sweeps through the Asia-Pacific region, Europe and North America, global growth could fall to just 1.5 percent in 2020, far less than the 3 percent it projected before the virus surfaced. The rush of reassurance came amid increasingly dire economic projections tied to the coronavirus, which is spreading outside of China to South Korea, Italy, France and the United States, idling factories, quarantining workers and curtailing international travel.
“This scenario would put Japan and Europe in recession, and the U.S. close to zero,” Laurence Boone, the organization’s chief economist, told reporters during a conference call Monday. The Organization for Economic Cooperation and Development said global growth could plummet to just 1.5 percent in 2020, far less than the 3 percent it projected before the virus surfaced, should the outbreak sweep through the Asia-Pacific region, Europe and North America. If things get bad enough, Japan and Europe could plunge into recession, the O.E.C.D. warned. Predictions for the United States were nearly as bad: Most analysts expect zero or negative growth in the second quarter, with some forecasting a potential recession before year’s end.
She added, “This is not a worst-case scenario.” The impact could be even more dire if the outbreak spreads beyond Asia, Europe and the United States and into the southern hemisphere, she said. That glum outlook sent stocks in Europe temporarily lower, but expectations for a far-reaching global response — including the potential for a coordinated interest rate across central banks — helped to stem market bleeding.
Even if the outbreak is mild and mostly contained outside China — the O.E.C.D.’s expected scenario — global growth could be lowered about half a percentage point relative to previous forecasts, according to an update that the group released on Monday ominously titled, “Coronavirus: The World Economy at Risk.” The S&P 500 posted its best gain in more than a year, rising by more than 4.6 percent, amid a surge in interest-rate sensitive sectors such as utilities and real estate. Treasury yields continued to tumble, hitting a record low, as investors bet that the Fed will cut interest rates by half a percentage point at its next meeting.
The spread of the coronavirus has sent markets reeling as investors anticipate painful economic fallout. Economists across Wall Street revised their 2020 outlooks sharply downward. “It has already stoked expectations of a coordinated cut,” Roberto Perli, a former Federal Reserve researcher who is now an economist at Cornerstone Macro, said in an email following news of the G7 meeting. “If it doesn’t happen, it will only add to market volatility.”
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Goldman Sachs economists expect global growth to slump to around 2 percent for the full year, down from their previous 3 percent forecast, but said in a note Friday that there are risks of a worldwide recession if the virus becomes a more severe global pandemic. President Trump joined in pushing for Fed action on Monday, saying that Chair Jerome H. Powell and his colleagues should quickly slash interest rates as economic risk from the virus becomes more stark.
They also expect the virus to drive the U.S. economy to zero growth in the second quarter before shaving about 1 percentage point from growth for the year as a whole, using a measure that looks at the fourth quarter versus the prior year. Its economists said in a note Sunday that “while the U.S. economy avoids recession in our baseline forecast, the downside risks have clearly grown. “As usual, Jay Powell and the Federal Reserve are slow to act,” he wrote on Twitter.
Neil Shearing, group chief economist at Capital Economics, wrote in a note Monday that in a good scenario, global growth will fall to 2.5 percent this year — the weakest pace since 2009. In a bad scenario, it could shrink by 0.5 percent, a contraction on scale with the financial crisis. Later, when asked about the state of the economy amid a tumultuous financial week, the president noted that “the market’s up today” and insisted, “Our country’s very strong economically.”
Analysts from the O.E.C.D., a forum of 36 countries meant to foster cooperation and trade, stopped short of forecasting an all-out global downturn. But they stressed that there was potential for the economic impact to become much worse and said that governments should already be pouring resources into health care and taking measures to support businesses hit by slumping sales. But he said he would like the Federal Reserve to do more to address the financial challenges posed by the spread of the coronavirus.
“Regardless of how the virus spreads in coming days and months, we call on governments to take action now,” Ms. Boone said. “I don’t think the Fed’s looking at it,” he said, “but they should be.”
The economic risks posed by the coronavirus are unpredictable. It is unclear how far and fast infections will spread, making it hard to estimate the economic fallout from such actions as widespread quarantines and supply chain disruptions. Outbreaks in China, Japan, Iran, Italy and South Korea have already closed many factories and slowed or halted tourism. Even in the United States, which has had few cases, major companies like Twitter and Amazon have told their employees to avoid nonessential travel. Mr. Powell has not committed to cutting rates, which are already in a range of 1.5 percent to 1.75 percent, lower than in previous expansions. But he signaled on Friday that the Fed was ready to act to support the economy. Investors now expect the Fed to slash rates by half a percentage point at its March meeting or even before, and see borrowing costs drop as much as a full point lower by the end of the year.
Chinese data already suggest unexpectedly large economic costs. Two gauges of manufacturing activity slumped in February, with the Caixin manufacturing index falling to the lowest level in its history in data released Monday. Real-time trackers of Chinese activity, from coal consumption to property sales, remain severely depressed. Even if the outbreak is mild and mostly contained outside China — the O.E.C.D.’s expected scenario — global growth could be reduced about half a percentage point relative to previous forecasts, according to an update that the group released on Monday ominously titled “Coronavirus: The World Economy at Risk.”
Central banks have signaled that they stand ready to act as the damage mounts, and investors have begun looking to the Federal Reserve and its global counterparts for relief. The Fed chair, Jerome H. Powell, released a statement on Friday pledging that the central bank would “act as appropriate” to protect growth. The Bank of Japan and Bank of England issued statements of their own on Monday, signaling preparedness. Goldman Sachs economists expect global growth to slump to around 2 percent for the full year, down from their previous 3 percent forecast.
“The Fed-led pivot reflects the global spread of the virus and its economic disruptions, sharp equity market weakness and an emerging realization that corporate cash flow problems could create strains in credit markets,” Krishna Guha and Ernie Tedeschi at Evercore ISI wrote in a note following the announcements. Neil Shearing, group chief economist at Capital Economics, wrote in a note Monday that in a good scenario, global growth will fall to 2.5 percent this year — the weakest pace since 2009. In a bad scenario, it could shrink by 0.5 percent, a contraction on a scale with the financial crisis.
Ms. Boone said that she welcomed expressions of resolve by central banks, but that the onus was also on governments. Growth in the United States is also at risk from the virus, especially if the number of infections continues to rise. Goldman Sachs economists said in a note Sunday that “while the U.S. economy avoids recession in our baseline forecast, the downside risks have clearly grown.”
For example, political leaders could provide incentives for companies to shorten work hours rather than lay people off, or delay tax payments for small businesses suffering from plunging sales. Ms. Boone said it would be “a very positive signal” if the United States and China were to drop the tariffs they had imposed as part of a trade war. Deutsche Bank’s economics team changed its baseline forecast to expect the economy to shrink in the second quarter, with the stock market falling 20 percent below its recent peak, before rebounding in the fall. Its new “worse case” forecast sees the United States entering recession before year end.
“This is not a shock that central banks alone can address,” Ms. Boone said. “It really, really needs to be accompanied by fiscal measures.” The exact outcome is hard to quantify because the risks posed by the coronavirus are inherently unpredictable.
The French finance minister, Bruno Le Maire, said on Monday that the government would “unlock whatever it takes” to help French companies. “We will show complete solidarity vis-à-vis all contractors that today are on the front line,” he said. It is unclear how far infections will spread, making it difficult to estimate the economic fallout from such actions as widespread quarantines and supply chain disruptions. Outbreaks in China, Japan, Iran, Italy and South Korea have already closed many factories and slowed or halted tourism. Even in the United States, which has had few cases, major companies like Twitter and Amazon have curbed business travel.
Even under the O.E.C.D.’s main scenario, in which the virus is quickly contained, its economists anticipate that China’s central bank and many of its global counterparts would lower interest rates a quarter percentage point or more. The economic impact is slowly filtering through the real economy. Priya Misra, a rates strategist, spends a lot of time thinking about the path of economic growth, so it raised alarm bells in her mind when her employer, TD Securities, cut her international business trip short last week.
That said, the report went on, “There is limited need for further reductions in policy interest rates in the United States unless the risks of a sharper growth slowdown rise.” It was part of the company’s new ban on nonessential trips. Her concern only grew on Monday, as clients who were planning to come to her from other parts of the United States rescheduled in-person meetings to phone calls. And it crescendoed when an out-of-town client told her not to drive to their office — outsiders were no longer allowed into the building.
Should the virus spread more widely, countries that have room to cut rates are likely to lower them by 1 percentage point on average in 2020, according to the report. But central banks in South Korea, the United Kingdom, and Australia all have limited room to lower borrowing costs, which are already low, and would hit zero in the report’s scenario. “That’s why I think the growth impact is still not understood — people don’t travel, people don’t plan vacations,” she said. “Manufacturing was already weak, but will we now see it in consumer spending?”
“The increasing constraints on monetary policy suggest that a swift and sizable discretionary fiscal response would be needed in event of a scenario of this type occurring,” the O.E.C.D. said. “This reinforces the need for stronger global policy cooperation.” If they last, preventive measures like travel limits and partial quarantine could have far-reaching implications. Airlines, hotels and conference centers might suffer. Consumer spending, the backbone of an 11-year-long economic expansion in the United States, could weaken.
The sharp drop in stock markets last week “adds to the persisting financial vulnerabilities from the tensions between slower growth, high corporate debt and deteriorating credit quality, including in China,” the report said. “These developments raise the risk of significant corporate stress if risk aversion intensifies from already high levels.” In China, where the virus has raged for about two months, data already suggest unexpectedly large economic costs. Two gauges of manufacturing activity slumped in February, with the Caixin manufacturing index falling to the lowest level in its history, according to data released Monday. Real-time trackers of Chinese activity, from coal consumption to property sales, remain severely depressed.
Ms. Boone said she was concerned that the outbreak could undermine businesses’ confidence and prompt companies to cut back on hiring and investment at a time when global growth was already weak. Central banks have pre-emptively signaled that they stand ready to act as the damage mounts. The Bank of Japan, European Central Bank and Bank of England issued statements of their own on Monday, signaling preparedness.
“All in all, the global economic situation before the virus hit was not that robust,” she said. “The Fed-led pivot reflects the global spread of the virus and its economic disruptions, sharp equity market weakness and an emerging realization that corporate cash flow problems could create strains in credit markets,” Krishna Guha and Ernie Tedeschi at Evercore ISI wrote in a note after the announcements.
Liz Alderman contributed reporting. But central bankers have far less room to loosen monetary policy today than they did heading into the 2007 recession. In the United States, the federal funds rate was above 5 percent back then and was ultimately lowered to near zero.
Laurence Boone, chief economist at the O.E.C.D., said in a conference call on Monday that she welcomed expressions of resolve by central banks, but that the onus was also on elected officials.
“Regardless of how the virus spreads in coming days and months, we call on governments to take action now,” Ms. Boone told reporters.
Political leaders could provide incentives for companies to shorten work hours rather than lay people off, or delay tax payments for small businesses suffering from plunging sales, for example. Ms. Boone said it would be “a very positive signal” if the United States and China were to drop the tariffs they had imposed as part of a trade war.
“This is not a shock that central banks alone can address,” Ms. Boone said.
While officials in the United States wait for the Fed to act, government help is more forthcoming in parts of Europe. Italy has already announced a stimulus package, and the French finance minister, Bruno Le Maire, said on Monday that the government would “unlock whatever it takes” to help French companies.
“We will show complete solidarity vis-à-vis all contractors that today are on the front line,” he said.
Liz Alderman and Matt Phillips contributed reporting.