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Will the Coronavirus Cause a Global Recession?

Will the Coronavirus Cause a Global Recession?
  • The Wuhan coronavirus outbreak continues to intensify. And Chinese authorities may be downplaying its severity.
  • The virus poses a massive risk to the global economy. But U.S markets seem nonchalant.
  • China has grown to become a massive part of the global economy. When it sneezes, the world catches the coronavirus.

When America sneezes, the world catches a cold. That’s how the old saying went. And its logic was simple. As the largest and most complex economy in the world, every other economy was so intertwined with the United States that they couldn’t avoid the fallout from an economic calamity within its borders.

But what happens when China catches a cold? Or better yet, when it catches a rapidly spreading and highly fatal disease?

The Wuhan coronavirus could potentially have a disastrous effect on the global economy. Even if the virus doesn’t grow to become a global pandemic, its economic ramifications may be enough to cause a recession in China, World Bank data suggests. This may lead to a domino effect that results in a global slowdown.

The Coronavirus Outbreak is Intensifying

As of the latest data, the Wuhan coronavirus has grown to infect almost 38,000 people with 813 deaths. Most of the fatalities are in mainland China with 780 recorded in Hubei province alone. The Chinese authorities have instituted wide-ranging and draconian measures to combat the crisis including mass travel restrictions, city-wide quarantines, and suspending business operations.

But perhaps most troubling is that the outside world doesn’t know if China is being completely accurate with its numbers.

The scale of the government response along with their attempts to censor freedom of speech in Wuhan suggest that the outbreak could be much worse than the authorities are reporting. Independent research from the Lancet medical journal suggests that the coronavirus may have already infected over 75,000 people. Researchers in Hong Kong paint a dire view of the situation, suggesting that the virus could eventually grow to infect 150,000 people a day.

Gabriel Leung, a professor of medicine at Hong Kong University, states the following:

The apparent discrepancy between our modeled estimates of 2019-nCoV infections and the actual number of confirmed cases in Wuhan could also be due to several other factors. These include that there is a time lag between infection and symptom onset, delays in infected persons coming to medical attention, and time taken to confirm cases by laboratory testing.

Economic Impact Already Being Felt

Oil prices have fallen for five weeks in a row because Chinese demand for transportation is so suppressed due to the crisis. And major American firms like Starbucks (NYSE: SBUX) and Alphabet (NASDAQ: GOOGL) are scaling back operations. Foxconn, the maker of Apple’s (NASDAQ: AAPL) iPhone, was blocked from reopening its plants – a move that was scheduled to begin on Monday.

Yet, the U.S. equity markets are still remarkably nonchalant about the coronavirus, despite its obvious negative impact.The stock prices of Apple and Tesla, two companies with significant exposure to China, have risen significantly in the weeks after the start of the outbreak.

source: ycharts.com

Experts Suggest a Major Economic Shock is Inevitable

The overly optimistic U.S markets are in for a rude awakening. America’s economy has become intertwined with China, and an economic shock in one nation will harm the other. If the crisis continues to worsen, a global recession is a real possibility.

China’s economy accounts for a staggering 16% of the global economy. And when it coughs, the world gets sick.

According to a study from the World Bank, a major global pandemic could delete up to 5% of the world’s GDP – a sum that is over $3 trillion. They rate the potential impact alongside a global war.

The report stated the following:

Respiratory infections like flu are often highly transmissible (it is easy for an infected person to transmit the pathogen to several other people in a short span of time) so they can spread fast; if they are also sufficiently virulent, they pose a formidable threat. A severe pandemic would resemble a global war in its sudden, profound, and widespread impact.

While the Wuhan coronavirus hasn’t turned into a pandemic yet, the global economy isn’t ready to deal with economic disruption of this magnitude.

China’s economy was on shaky footing, even before the outbreak. The country is already drowning in debt. According to the Institute of International Finance, the country’s debt topped 300% of GDP in 2019 – this compared to around 106% in the United States.

China also has multiple speculative bubbles in everything from real estate to provincial bonds.The coronavirus may be the catalyst that sends this house of cards tumbling down.

The opinions expressed in this article do not necessarily reflect the views of CCN.com.

This article was edited by Gerelyn Terzo.

Last modified: February 9, 2020 3:31 PM UTC

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