Alarming global virus spread renews recession fears

Dubai: With death toll rising on account of a deadly virus spreading to countries outside of epicentre China, fears of a global recession and a delayed market recovery have returned to the forefront.

Markets tanked last week after risk-aversion spiked as coronavirus swept the globe, with cases in at least 47 countries, prompting a warning from top US health officials that there could be an outbreak in the world’s largest economy as well.

Coronavirus panic sent world stock markets tumbling again on Friday, setting them on course for their largest weekly fall since the 2008 global financial crisis, with over $5 trillion wiped from global market value so far this week.

Stocks shaved some losses on Wall Street after Federal Reserve chairman Jerome Powell said the central bank will act as appropriate to provide support to the U.S. economy, but the S&P 500 index remained on track for its second-largest weekly percentage decline since 1940.

After two months of the virus largely being contained in epicentre Wuhan and neighbouring cities and just when there were growing evidence that the contagion had slowed in China, the last few days saw a sudden spike in cases worldwide, setting of panic-selling in almost every stock market globally.

“The rise in new cases in China is slowing, but the rapid spread in other countries and regions around the world makes the chances of a v-shaped recovery in the first quarter less and less likely, and this is being increasingly reflected in market moves,” said Daniel Marc Richards, MENA Economist at Emirates NBD.

Delayed recovery

“Risk markets recovery depends on the speed with which China’s capacity utilization bounces back to the normal level,” said Vijay Valecha, Chief Investment Officer at brokerage Century Financial, referring to Chinese President Xi Jinping’s call for normalization and an evident gradual pick in economic activities.

While analysts flagged the unlikelihood of a recovery in the first quarter of the year, as per current standing economic recovery is widely seen in the second half of the year.

The events come as Wall Street and other indices worldwide have been trading at record highs. But the recent sell-off has pushed top indices to having the worst week since the financial crisis and analysts caution that it is unlikely to get any better as the companies deliver a wrath of profit warnings as a result of the virus impacting operations.

“With expectations still for a strong second half recovery in global economy, it is tough to call for an end to the secular multi-year bull market,” Valecha added. “To find a bottom in the index is also extremely tough.”

US S&P500 and Dow Jones indices in the year so far have shed 5.5 per cent and 3.5 per cent respectively. Stocks in Europe and Asia too traded in red across the board, with Britain’s FTSE sinking 8 per cent and Germany’s DAX down over 6 per cent in 2020 to date.

“Uncertainty over the magnitude of global quarantine efforts could easily take US stocks to bear (negative) market territory,” said Ed Moya, a market analyst with OANDA. “Volatility is likely to remain in place as the central banks and governments all over the world prepare to release the floodgates of stimulus.”

Recession fears return

The International Monetary Fund has so far only tweaked its outlook for China and the rest of the world this year due to the outbreak of the coronavirus disease now known as COVID-19, with expectations that Chinese growth will suffer early and largely be made up by the end of the year.

But some other forecasters fear that the knock-on effects of near-paralysis in China—coupled with disrupted supply chains, border closures, a slowdown in tourism and travel, and jitters about the resilience of emerging markets—could hammer the global economy just as hard-hit manufacturing countries and beleaguered consumers were showing signs of confidence.

”The two global headwinds to strike China in such short order could do the unthinkable and put global economy into recession,” said Jasper Lawler, Head of Research at London Capital Group. “The timing of the inverted US yield curve last year backs up that conclusion.”

Oxford Economics, for instance, now expects the virus to knock first-quarter Chinese growth down to just 3.8 percent and to only 5.4 per cent for the whole year—a big drop for a country that needs growth of about 6 percent to meet its economic and political targets. Globally, the impacts of the virus could drag global growth down to about 2.3 per cent this year, the lowest level since the depths of the financial crisis, analysts at Oxford added.