Only a month ago, the outbreak of the coronavirus was still largely a China-centric health crisis. But while China now appears to be fully on the road to recovery – barring a resurgence in infection numbers as its economy gets back up and running again – the situation in many other countries has since deteriorated rapidly.
Over the past week, a slew of developments underscored the extent to which the contagion has now fully evolved into an ominous new global phase: the WHO finally deciding to characterize COVID-19 as a pandemic and later calling Europe the new “epicenter” of the disease; Spain and then France both announcing country-wide lockdowns, following the path trod by Italy towards full quarantine; President Trump declaring a “national health emergency” in the United States; and the number of global cases overtaking those inside China for the first time.
A global recession looks almost inevitable
The coronavirus has laid bare not only the human tragedy of how easily diseases can spread among populations but also the cascading economic impact that entails. With outbreaks intensifying in numerous countries and China still struggling to restart its economic engines, it now looks almost certain that the pandemic will tip the world economy into a recession in 2020.
In early March, a report by the OECD projected a short-lived but severe downturn as its base-case scenario, seeing global GDP growth falling to 2.4% for 2020, down from last year’s already weak 2.9%. But its “domino scenario” saw growth plummeting to as little as 1.5% should a much broader, protracted outbreak occur around the world.
After the staggering increase in global cases over the last couple weeks, that darker scenario is not only unfolding: it looks like the eventual consequences may be even worse. On Tuesday, Morgan Stanley declared that a worldwide recession in 2020 was now its “base case,” predicting growth would tumble to 0.9% this year; similarly, Goldman Sachs downgraded its growth forecast to 1.25%.
Panicked financial markets
Investors’ fears of the looming global recession have continued to batter financial markets. On Monday, U.S. stocks suffered their worst losses since 1987’s Black Monday crash, with the Dow plunging 12.9% while the S&P 500 dropped nearly 12% and the Nasdaq Composite closed down 12.3%. Extreme market volatility can be expected to persist so long as the global news cycle remains dominated by stories about the escalating international outbreaks and worsening economic fallout.
The biggest uncertainty is when exactly COVID-19’s spread around the world can be stopped. Of course, the disease’s trajectory is inherently unpredictable which means any forecasts about the long-term economic effects are speculative at best. But given that it took China two months to bring the number of new infections down to single digits, it would be reasonable to expect other heavily affected countries to require at least the same amount of time to mirror China’s success.
China’s sharper-than-expected contraction
From late January through much of February, the Chinese economy was brought to a virtual standstill as authorities took extraordinarily strong steps to contain the spread of the coronavirus – including large-scale quarantines, an extension of the Chinese New Year holiday, and domestic travel restrictions. This all-out national drive proved hugely effective in halting the domestic outbreak; infection rates have steadily declined since their peak in early February.
Not surprisingly, the economic fallout has been severe. On Monday, the National Bureau of Statistics (NBS) released the official data for the Chinese economy in January and February which showed an even deeper slump than most analysts expected. China’s industrial output fell by 13.5% compared to the same period a year ago, while fixed assessment investment plunged 24.5% and retail sales shrank 20.5%. The dire figures showed an “across-the-board contraction,” according to Xinhua News Agency.
While acknowledging the severity of the downturn, other Chinese state-run media emphasized that the “tide is turning” now that the coronavirus has been successfully contained, with the NBS describing the impact on the economy as “short-term, external, and controllable.” It also projected a significant rebound in economic activity this month and during the second quarter.
A long road to full recovery
After the unprecedented shutdown of activity, China’s return to economic normalcy will be a lengthy, drawn-out process. Factories across the vast Chinese industrial complex continue to gradually reopen – with production being ramped up in stages – but output is significantly below typical levels due to ongoing mobility restrictions faced by workers, transportation bottlenecks, and weak domestic demand. On the consumer front, spending is still highly subdued as people not only remain cautious about venturing out again but also more financially conservative during difficult times. At the end of last week, Bloomberg Economics estimated that the Chinese economy was running at 80% to 85% of normal capacity.
Unless a fresh round of infections occurs domestically, the gravest threat to China’s recovery is the dramatic escalation worldwide. When China went under lockdown in January and February, the economic repercussions reverberated worldwide; the huge disruptions caused to supply chains, trade, investment, and commerce made all-too-clear just how deeply intertwined China’s US$14 trillion economy is with the rest of the world today.
In mid-March, the situation has now reversed: China is on the mend while other major economies are shutting down. And if China faces an abrupt fall in global demand as the rest of the world reduce imports, then staging a full economic recovery at home will likely prove elusive – at least until the pandemic begins to wane internationally.