The contagion effect of the coronavirus has begun to spread around the world, largely through disruptions to international supply chains. Economic regions have become growingly isolated, especially in areas such as trade. China’s deep integration into the world economy, accounting for 17% of global output, has thus prompted recessionary fears, threatening the stability of share markets, commodity prices and production.
Investors around the world have been faced with the prospect of extensive uncertainty as the containment deadline of the virus remains unknown. Share prices have been hit particularly hard as the damage to factory operations have been significant, in part attributed to the restrictions on labour mobility by national quarantines. The possibility of a sharp global recession has further stirred investor fears, indexes such as the Dow Jones and S&P 500 posting their sharpest daily declines since 2018. This uncertainty has subsequently triggered a sudden flight to safe-haven assets, with the prices of gold rising by more than 10% since the start of the year. While the global damage is still too early to quantify, early analysis has identified a smaller and less productive workforce and a possible reordering of globalisation as medium to long-term costs borne from COVID-19.
The spread of the pandemic has also shocked global governments as they attempt to grapple with the severity of new infections. Notably, recent outbreaks in the Eurozone may undermine a recent rebound in growth within its services sector. As supply chain disruptions place upward pressure on prices, a large slowdown in local demand can be expected as both consumers and business confidence indicators continue to fall, dampening demand-led inflation. Along with falling commodity prices, such as a 4% reduction in oil prices on Monday, this suggests that the current low global inflationary environment is likely to perpetuate in the short-run. With the Eurozone well-accustomed to unconventional monetary policy options having previously engaged in quantitative easing to stimulate demand, the economic effects of the virus may well force the ECB’s hand in reducing the current 0% cash rate into negative territory. Certainly, the impetus is on policymakers and fiscal stimulus to respond to future global economic shocks through means such as tax cuts and increased spending.
