Risk Aversion or Pivot to Global Crisis

February 24 was another “Black Monday” for global equities markets. All three major US stock indexes fell by 3.5%. The Dow Jones Industrial Average and S&P 500 both lost all the gains they’d posted since the beginning of the year, European stock indices went deeply negative (the European Stoxx Europe 600 witnessed its worst decline since 2016), while the spot price of gold reached $1,700 per troy ounce.

Fears that the spread of the Chinese coronavirus will have a negative impact on the global economy are forcing investors to seek safe havens for their money (precious metals and US Treasury bonds) to limit their losses if markets continue to fall. An overall flight to safety has begun, negatively affecting stock markets, commodity prices and currencies of developing countries.

The drama that has arrived with the end of February 2020 in global financial markets looks almost the same as the shock of December 2018, when 93% of equities worldwide were losing value and the world was on the verge of a global recession. Then, more than a year ago, a sharp and synchronised easing of the monetary policy was instigated by the US Federal Reserve, the ECB, the Bank of Japan, the People’s Bank of China and a number of central banks of other big countries, saving the situation thanks to a total reduction of interest rates and the injection of additional funds into national economies. The global recession did not happen.

At the same time, the problems of the global economy have not disappeared. The total value of global debt is breaking records and this year may reach 325% of global GDP, and only further lending expansion and low interest rates have managed to keep the entire construction of global consumption “afloat”. Investment activity in the real sector is declining; economic growth is falling. At the end of 2019, a reduction in industrial production in Germany and Japan became apparent, and now China is joining them.

As early as the beginning of January 2020, before the general panic related to the spread of the novel coronavirus, the World Bank in its report pointed to a “slowdown in the economies of the largest countries and financial turmoil in emerging markets”. The IMF revised its forecast for global economic growth downward due to negative trends in a number of developing countries and risks of increased international tension and social unrest.

At the beginning of the year, it seemed that the signing of the Phase One trade agreement between the United States and China had removed some risks, and the global elites in Davos switched from discussing the economy to environmental issues. The coronavirus brought everyone back to gloomy reality and uncovered the “pitfalls” of the global economy, as well as the unprecedented dependence of developed countries on the value chains built onto China, and the total interconnection of financial markets.

World economic losses due to coronavirus are comparable to losses from big trade wars and are estimated at $250 billion per quarter. If the spread of coronavirus cannot be stopped quickly and the epidemic begins to cover region by region, country by country, then the losses in 2020 will reach $1 trillion.

Coronavirus Impact: Beyond the Scope of Rationality
Wan Qingsong
The negative impact of the novel coronavirus is temporary and controllable, and will not lead to catastrophic consequences because the Chinese government is determined to effectively control the spread of the epidemic.

Will the coronavirus cause a new economic crisis? The answer is obviously no. A recession, namely a decline in production for more than two consecutive quarters this year, is practically guaranteed to hit the world economy, but the basic foundations laid by globalisation can be sustained. It takes more time to destroy them and plunge the world into a global economic crisis than production being shut down by quarantines, serious geopolitical negativity, increased protectionism, regionalization and the desynchronisation of economic processes. 

Meanwhile a hope remains that international efforts to combat the spread of the COVID-2019 will bear fruit, and that the monetary incentives of the main central banks will be activated once again to the greatest extent possible. Most of the losses to the world economy caused by the coronavirus epidemic should be compensated for by the emission of central banks. The People’s Bank of China has already launched a programme to help its economy in the amount of 1.2 trillion yuan ($171 billion), and something similar investors expect in the foreseeable future from the US Federal Reserve, the ECB, the Bank of Japan, etc.

But most likely, this will be the last barrier to global collapse, the last move. If unprecedented monetary measures are now in place, then in the future, governments and central banks will no longer have any effective recipes to counter an inevitable crisis. Solving the tactical tasks associated with the problems arising from the coronavirus will not yield a reduction of the risks associated with the excessive interdependence between the developed and developing economies. This year will only see the aggravation of the problem of global inequality and enormous debt. Then any new “black swan” will become a real trigger for global crisis. The “black swan” may appear in the foreseeable future, both because of the presidential election in the USA, and because of the accumulated social problems and imbalances in the world economy and the intensification of international tension, about which the IMF warned in its January report.

The Novel Coronavirus, Geopolitics and the World Economy
Alexander Losev
The risks of the novel coronavirus outbreak becoming a global pandemic are extremely low, but if the spread of the virus becomes uncontrollable, it can negatively influence internal political processes in China itself and lead to the collapse of economies in a number of regions, as well as the emergence of refugees and mass migration, military conflicts, and humanitarian disasters.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.