According to the World Health Organization[1], COVID-19 has infected over four million people in 110 countries globally since it emerged in December 2019. This pandemic has become one of this century’s greatest threats to the global economy and financial markets. A range of banks and financial institutions have offered worst-case scenarios for 2020. Meanwhile, fears of the COVID-19’s impact on the global economy have rocked markets worldwide, with stock prices and bond yields plunging.
Countries have locked down cities and suspended business operations to contain the COVID-19 outbreak. These measures will slow down the world’s largest economies and drag down the global economy along the way. Here are some of the factors that show the impact of the outbreak on the markets so far.
Downgrades in Economic Forecasts
In March, the Organization for Economic Co-operation and Development (OECD) shared its 2020 growth for almost all the major economies. Figure 1 shows how OECD downgraded its 2020 real GDP growth projections. Meanwhile, the global economy is expected to grow the Gross Domestic Product (GDP) by 2.4 percent[2] in 2020-down from the 2.9 percent[3] projected.
Slowdown in Manufacturing Activity
The manufacturing sector has been hit significantly by the rapid spread of COVID-19. The COVID-19 pandemic first hit manufacturers across the globe that rely on factories for materials and parts. As the countries impose lockdown measures, some factories that remained open have faced restrictions in receiving their supply of goods and materials. The reduction in demand for goods has exacerbated the challenges that the factories face. As a result, the factories across the US, Europe, and Asia have declined their output.
Services Contraction
The virus outbreak has hit the service industry, and the subsequent reduced consumer spending has hurt retail stores, restaurants, and aviation, among others. The service industry is a major source of growth and employment for many countries, including the US and China, which are two of the largest economies and consumer markets. A broader hit to the service industry globally affected the businesses in the transportation, real estate, and tourism sectors.
Declining Oil Prices
A major reduction in the global economic activity has lowered the demand for oil, causing oil prices to decrease to multi-year lows. A plunge in US crude oil prices reverberated across the globe and fueled renewed worries over the oil industry. The oil prices went negative for the first time in history, and now the industry is running out of storage space. Because of this, sellers rushed to dump their oil stocks, and buyers tried to wriggle out of purchase agreements.
Stock Market
Fear surrounding the impact of COVID-19 on the global economy has halted and brought down stock prices in major markets. The Dow Jones Industrial Average (DJIA) tanked by 1600[4] points, -putting it on pace for its worst decline since December 2008. Markets all around the world are nosediving, due to a combination of plummeting oil prices and a surge in global COVID-19 cases. Figure 2 shows year to date percentage changes in some of the major stock indices.
Conclusion
The COVID-19 outbreak has affected economic activity across the globe. Several of the world’s biggest economies have been hit by supply chain disruptions, such as travel and tourism. Some of the mainstream financial firms such as Goldman Sachs, JP Morgan, and Morgan Stanley expect that the US GDP will fall by an annualized rate of 6 percent in the first quarter and by 24 to 30 percent in the second quarter. If this is the case, it leads to a rise in unemployment and the likelihood of a global recession[5] increases. If the central banks and governments respond appropriately and the outbreak is weakened, the worst-case scenario will be avoided. But when it comes to the global economy, the theme, for now, is “don’t panic.”
Bibliography
[1] Yen Nee, L. 2020 “6 Charts show the Coronavirus impact on the global economy and markets so far” April 24 https://www.cnbc.com/2020/04/24/coronavirus-pandemics-impact-on-the-global-economy-in-7-chartshtmlhttps://www.who.int/docs/default-source/coronaviruse/situation-reports/20200507covid-19-sitrep-108.pdf?sfvrsn=44cc8ed8_2
[2] Elliot, Smith. 2020 “Here’s why financial markets are tanking around the world” March 9 https://www.cnbc.com/2020/03/09/coronavirus-heres-why-financial-markets-are-tanking.html
[3] Nouriel, Roubini. 2020 “ This is what economic fallout from coronavirus could look like” April 6 https://www.weforum.org/agenda/2020/04/depression-global-economy-coronavirus/
