With coronavirus infections spreading outside China to countries in Asia, Europe and the United States, global stock markets have remained very volatile in the recent weeks
As of March 3rd 2020, more than 92,000 cases of the Coronavirus (also known as the COVID-19 virus) have been confirmed worldwide, with more than 3,100 deaths. What is believed to have started in Wuhan, China has now spread to several countries across the globe and claimed several victims. Infected patients have also been detected in India.
While the disease has affected public health, there has been a lot of discussion concerning its impact on global stock markets. Even as health officials work overtime to contain the outbreak, many factories have shut down, businesses have been impacted and companies have readjusted their annual profit expectations to factor in the impact of the virus. Economists are also predicting a decreased growth of the world economy at large. The Organisation for Economic Cooperation and Development ( OECD) has said in its forecast that the global economy could grow at the slowest pace since 2009 due to the coronavirus outbreak. Growth forecast in 2020 is now at only 2.4 percent, down from 2.9 percent in November last year. Also, it has been forecast that a more intensive outbreak could half the growth to 1.5 percent. Naturally, the global markets stock have felt the impact. Let’s take a look at Coronavirus and its impact on global stock markets.
Global stock markets have remained very volatile in the last few weeks. Initially, people did ignore the impact of the virus to a large extent, but that changed with the infection spreading to the United States, Europe and the Middle East. On February 24th, the DOW closed at more than 1,000 points down, making it the worst day in two years. The S&P 500 index also fell sharply. This is mostly because analysts warned that the coronavirus outbreak could drag down economies around the globe in its wake. At the same time, European markets recorded their worst session since 2016, and major benchmarks in Asia also showed signs of slowing.
The Sensex crashed by 1,300 points on March 2nd 2020, after two recent coronavirus cases were reported in the country. The ongoing turmoil is expected to continue as the disease spreads. With Italy, Iran and South Korea emerging as new hotspots for the virus after China, the economic activity is expected to slow down even further.
Naturally, investors the world over are concerned about the coronavirus impact on the global stock markets. In an attempt to analyse this, one must first assess its effect on China’s economic activity.
Impact on China’s economic activity: China is currently the second-largest economy of the world, and any effect on its economy would have a ripple effect all the world over. Ever since the virus broke out, the Chinese government has been taking severe measures to contain it. Entire cities and provinces have been locked down and movements of citizens restricted, while major corporations have either halted or slowed down production activities. Factory activity in China contracted at the fastest pace on record in February, bringing into focus the damage inflicted by the coronavirus outbreak.
China’s GDP growth is expected to moderate in Q1 2020 to its lowest level since the 2008 financial crisis due to the outbreak of the virus. For the full year, economic growth in China is expected to slow down to 6 per cent. A lot depends on how the virus pans out. If the infection is contained soon, in the next week or so, the impact will be felt mostly in Q1 and will peter off in Q2. However, if the outbreak is not reined in, the recovery will be much slower and the overall economic growth for this year may be as low as 5- 5.5 percent. The Chinese government has announced several measures to boost the economy, which ranges from stimulus packages, waiving off certain taxes and lowering interest rates on medium-term loans. Since China is a major manufacturing hub, supply chain disruptions are expected to impact industries all the world over. Industries like automobiles and pharmaceuticals are likely to be hit the most.
Back on track: Over the last few days, the number of new cases and deaths in Mainland China has been on a decline. This signals that the impact of the virus may be peaking and that the situation could get better in the coming weeks. A large proportion of workers are slowly rejoining work after the extended slowdown, especially in the provinces that have not been affected majorly by the virus. However, government restrictions, issues with logistics and other factors mean that the recovery is likely to be slow. Learnings from the SARS outbreak in 2003 show that manufacturing can rebound primarily if the virus is contained quickly. However, the impact of Coronavirus is expected to be more as the disease is spreading more rapidly and China is more linked to the global economy now as compared to 2003.
Central banks respond to the crisis: On March 3rd, the US Federal Reserve announced an emergency rate cut. It was the US’s first emergency rate cut since the financial crisis of 2008. While the markets rallied after that, very soon the markets fell again, as investors woke up to realise that a rate cut might not be enough to cushion the US economy from the impact of the Coronavirus. Other Central Banks are expected to follow suit to mitigate the effects of the crisis, with Reserve Bank of Australia also slashing rates. The World Bank has pledged a $12 billion emergency fund that includes low-cost loans and grants. This is expected to help countries improve how their public healthcare systems respond to the crisis and also get the private sector involved to reduce the economic impact. These measures may reduce the effects of the virus on the economy and markets.
Going ahead: Keeping all the above developments in mind, one can say that is still not possible to understand the Coronavirus impact on global share markets shortly conclusively. This is because there isn’t enough information on how the infections from the virus will spread. It is also unclear how governments all the world over will initiate efforts to contain the virus. Reactions in the financial sector are also indeterminable; however, global stock markets may remain volatile in short to medium terms.