The COVID-19 pandemic is taking a mounting economic toll and causing widespread stress in financial markets. China’s domestic demand has plunged and shortages of Chinese-made parts and components have disrupted global supply chains and crimped production around the world. Given the spread of the virus to other large economies in the world, the economic fallout is growing quickly. Many research houses are forecasting a world recession. Moreover, risks are growing that the downturn could be larger than the 2008-09 global financial crisis, when world GDP shrank 1.7% in 2009. The longer it takes to contain the virus, the greater the toll on global trade and the world economy.
Major stock markets around the world have suffered sharp declines in the range of 30% to 40% in the past four weeks, signalling lower corporate profitability and reducing prospects for business investment. Falling commodity prices are hurting mining and energy resources producers in Latin America, Australia and Canada. Copper prices, a bellwether of global demand, have fallen about 20% since the start of the year. Sharply lower oil prices, reflecting a ramp up in output from Russia and Saudi Arabia, provides some relief for net oil importers but hurts hydro-carbon exporters, particularly in the Middle East and Africa.
Tighter financing conditions, reflecting lower access to and rising costs of US dollar financing, will amplify the economic shock in some emerging markets (EMs). Risk aversion is prompting investors to pile into safe haven assets. Capital that had been flowing into EMs over the past decade is now rushing out, with outflows exceeding the 2013 “taper tantrum” and 2008-09 global financial crisis. That is resulting in depreciating currencies and rising bond yields in some EMs, for example Sri Lanka and Mongolia. Countries with sizeable twin current account and fiscal deficits and/or a significant reliance on external financing are especially vulnerable to tightening financing conditions. Rising external funding costs and weaker currencies inflate the value of foreign-currency denominated debt.
Countries with stronger policy institutions, healthcare systems and higher levels of trust in government will be better placed to manage the COVID-19 outbreak. To shore up confidence and liquidity, policymakers have responded by adding significant fiscal and monetary stimulus. This has so far proved ineffective at stabilising financial markets. Overall, fiscal and monetary policy cannot completely offset the demand loss that comes from widespread economic shutdowns and cannot mend supply chains. Only once fears of infection recede and governments lift restrictive policies will global activity, including in Australia’s largest export partners, recover (Table).
