OPINION: The novel coronavirus outbreak may prove vexing for long-complacent financial markets.
NEW HAVEN, CONN. — The world economy has clearly caught a cold. The outbreak of COVID-19 came at a particularly vulnerable point in the global business cycle. World output expanded by just 2.9% in 2019 — the slowest pace since the 2008-09 global financial crisis and just 0.4 percentage points above the 2.5% threshold typically associated with global recession.
In other words, there was no margin for an accident at the beginning of this year. Yet there has been a big accident: China’s COVID-19 shock. Over the past month, the combination of an unprecedented quarantine on Hubei Province and draconian restrictions on intercity travel has brought the Chinese economy to a virtual standstill. Daily activity trackers compiled by Morgan Stanley’s China team underscore the nationwide impact of this disruption. As of Feb.
The shortfall of Chinese demand is also likely to hit an already weakening European economy very hard — especially Germany — and could even take a toll on a Teflon-like U.S. economy, where China plays an important role as America’s third-largest and most rapidly growing export market. The sharp plunge in a preliminary tally of U.S.
Again, that is far from being the case today. COVID-19 hit at a time of much greater economic vulnerability. Significantly, the shock is concentrated on the world’s most important growth engine. The International Monetary Fund puts China’s share of global output at 19.7% this year, more than double its 8.5% share in 2003, during the SARS outbreak.
This matters little to the optimistic consensus of investors. After all, by definition shocks are merely temporary disruptions of an underlying trend. While it is tempting to dismiss this shock for that very reason, the key is to heed the implications of the underlying trend. The world economy was weak, and getting weaker, when COVID-19 struck.
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