A sense of panic was palpable in all corners of the international financial system on Friday as coronavirus cases spread relentlessly across Europe, the Americas and reached sub-Saharan Africa for the first time.
Determined efforts of the Chinese authorities to contain the outbreak failed to settle frayed nerves after the World Health Organization, reacting to the news that four continents had at least six affected countries, raised its impact risk alert from “high” to “very high”.
Oil prices slumped to below $50 a barrel for the first time since the summer of 2017 and stock markets saw a week’s worth of frenzied trading translate into a $5 trillion loss – equal to an 11% fall in the value of all listed companies.
This massive sell-off, the worst since the 2008 financial crash, triggered a rush to buy assets considered safe havens in times of stress – including government bonds and gold. The interest rate on US treasury bonds, considered the safest of such havens, dropped to the lowest level on record.
The extent of the panic and the potential for widespread global economic damage brought a response from central bankers, led by Bank of England governor Mark Carney and Jerome Powell, chair of the US Federal Reserve, who took the unusual step of issuing a statement to reassure Americans.
Carney said it was clear that global economic growth this year “would be lower than it otherwise would be, and that has a knock-on effect on the UK”. He hinted that an interest-rate cut could be the bank’s next move to shore up business and consumer confidence, because “if the world is slower than the UK, a very open economy, it will have an impact”. But he insisted the UK economy remained in good health for the time being.
Within hours of Carney’s comments, Powell said: “We will use our tools and act as appropriate to support the economy.”
City analysts, struggling to cope with the implications on their economic forecasts, were unable to give a sense of how individual economies could be affected or where stock markets might settle.
There were several strands to their thinking. What if China and Japan’s factories were forced to close, in China’s case for a second time, limiting the supply of vital industrial components to the rest of the world? Japan has already shut its schools and may need to order the closure of business parks and factories to prevent the virus’s spread.
Without the parts that Japan and China produce by the shipload, there will be little to supply Germany’s factories, and the rest of Europe’s for that matter, when they are already struggling after 18 months of a tit-for-tat trade war between the US and China. Analysts worry that a supply shock will hit manufacturing businesses hard. Worse could befall service companies if the fresh cases in the US and Europe that have no known source become a source of dread among consumers.
The clampdown by the Swiss on commercial gatherings of more than 1,000 people, which forced the cancellation of the Geneva motor show, could become a more widely used measure to contain the virus.
If consumers shun shopping malls and high streets for fear of getting the virus, economies could be pushed into recession. In sub-Saharan Africa, where there is already concern about high government and corporate borrowing levels, a virus outbreak and economic downturn could be the tipping point into unsustainable debt for several countries.
The economic consultancy Oxford Economics said the UK, while on the periphery of the virus outbreak so far, was always going to suffer from the negative impact on tourism and disruption to imports from east Asia. But the slump in share prices had opened up “a new channel through which the coronavirus outbreak could weigh on the UK economy”.
It said: “Stock market losses have already exceeded those that we modelled in our ‘global pandemic’ scenario, in which high infection rates spread globally and the combination of disruption to activity and tighter financial conditions cause world GDP growth to slow to near-zero in the first quarter of 2020.”
There could be a quick bounce back if the virus is seen to be contained, but with dire manufacturing data already out this weekend from China, markets probably have further to fall before they finally turn.
