The widening coronavirus outbreak threatens to seriously disrupt the global economy just as it was steadying itself against headwinds from the U.S.-China trade dispute.
Stocks fell sharply on Monday around the world on news of more infections in different countries. The U.S. Dow Jones was down more than 900 points during mid-day trading, while in Europe, the pan-European Stoxx 600 dipped 3.6 percent amid fears about the first major outbreak on the Continent, an eruption of cases in Italy.
Cases also was reported in new countries in the Middle East.
Concerns are high in Europe, where the three largest economies already are scraping along at the edge of recession, with Germany particularly exposed.
China, the epicenter of the crisis, is a major sales market for German automobiles and serves as a source of parts for Germany’s own factories.
The global economy was just stabilizing after wobbles caused by the trade war between the United States and China and fears of a disorderly British exit from the European Union.
The coronavirus hit just as a U.S.-China preliminary deal and a Britain-EU agreement on a transition period had boosted hopes for a modest upswing, particularly in Europe.
Now the world economy could see its first quarterly fall in seasonally adjusted output since the global financial crisisof more than a decade ago, said Ben May, director of global macro research at Oxford Economics.
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Frequent business and tourism destinations for people from China are already being hit hard, confirming this will be a key way the pain will spread to other Asian economies, with Singapore and Hong Kong feeling the effects.
Comparisons to the 2003 SARS epidemic, another deadly outbreak that originated in China, aren’t reassuring because China’s share of the global economy today is much bigger than it was then, and supply chains moving raw materials, parts and products snake through the global economy more than ever.
Stock markets may have been slow to appreciate the risk posed by the coronavirus because they hoped central banks could step in with stimulus.
Erik Nielsen, group chief economist at UniCredit, said that while monetary or fiscal stimulus can boost demand in an economy, the virus is interrupting supply — which may not be so easy to boost with policy tools.
“Think of it this way: China has closed a reported 70,000 movie theaters because of the virus. That’s a supply shock, and no amount of income (demand) stimulus will boost ticket sales,” he said.
He said it is now “a virtual given” that global domestic output will take “a major hit” in the first quarter of the year.
While the stock markets seem to be acting as if the virus will be a short-term story with an early rebound, he said, “there is no evidence to support such an outlook.”
Individual companies already have reported trouble, most notably Apple, which said it will miss its sales target. But it could take until April or May before hard data on production and sales gives a clear picture of the impact on a regional or global level, May said.
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