Coronavirus spread heightens fears of recession: Expert

The US Federal Reserve. (File photo: Reuters)

As the coronavirus spreads, its impact on global markets is outpacing its impact on global health, according to the Head of Economic Analysis at AKE International Harish Natarajan.

Last week, global markets lost $5 trillion in what was the worst week for stocks since the 2008 financial crisis. US stocks lost nearly 12 percent and $3.5 trillion was erased for US-listed stocks during the week.

“In the worst case we are probably seeing a large global recession, which looks like the early quarters of the 2008 crisis,” Natarajan said.

China, ground zero for coronavirus, officially known as COVID-19, was the first to see its economy impacted. Now, the US is beginning to see the effects.

“Consumption, production, and trade are all down,” Natarajan said. “Corporations (particularly small and medium companies) will face difficulties, but we’d expect the global economy to recover relatively rapidly. In other words, at this stage it doesn’t appear that the COVID-19 liquidity crisis will become a serious solvency crisis – and we could expect a recovery to begin once to virus subsides.”

But effects on US markets have been profound as US stocks plummeted on Tuesday as the Federal Reserve’s emergency rate cut raised alarm over the magnitude of the impact the coronavirus was having on the economy.

The Dow Jones Industrial Average plummeted nearly 3 percent, 786 points, and the yield on US 10-year Treasury bonds briefly fell below 1 percent before recovering slightly, as investors sold equities and fled to safe-haven investments, such as bonds.

Investors are worried that the outbreak will upend the global economy and end the decade-long expansion. But Natarajan says comparisons to the global financial crisis are still alarmist.

“It’s worth noting that it could take a while for things to return to normal, and there will of course be damage, with some companies defaulting and declaring bankruptcy, but despite elevated levels of global debt – the medium-term impacts are unlikely to be as large as 2008,” he said.

Seven of the 11 major S&P sectors were trading lower. The industries that have been hit the hardest are tourism, retail, and other supply-chain dependent industries. Real estate and utilities were the outperformers – both commonly considered safer during periods of business turmoil.

The US Federal Reserve's decision to reduce key rates prompted Arabian Gulf central banks, who peg their currencies to the US dollar, to cut their benchmark interest rates.

The UAE Central Bank slashed the interest rate on its certificate of deposits by 50 basis points, according to a statement by the regulator on Tuesday evening.
 

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Last Update: Wednesday, 20 May 2020 KSA 10:02 - GMT 07:02
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