State of World Economy: Derailed
Coronavirus Derails Global Economy
The threat from the coronavirus (COVID-19) has developed into a global health pandemic of a scale not seen since the Spanish flu, around a hundred years ago. To date, there have been more than 1 million confirmed cases globally and over 50,000 deaths. The trajectory of infections is still steeply upwards, with the US becoming the latest epicentre of this global crisis.
Financial markets have displayed a high degree of volatility in response to the rapid spread of the coronavirus. The VIX (Wall Street’s ‘Fear’ index) surged to its highest level since the Great Financial Crisis, other risk indices also confirm a degree of investor pessimism not seen since October 2008, when the global financial system was close to collapse. While equity markets have recovered from their lows, the VIX index remains above 45 (a level that is 3 standard deviations above average) for its 20th consecutive session, suggesting the market remains concerned about volatility.
Having enforced strict lockdown measures to reduce the spread of the virus, rightly prioritising the human cost over the economic consequences, governments globally have announced unprecedented fiscal stimulus packages, including loan guarantees for businesses and income protection for workers, to cushion the economy during this hopefully temporary shock. Central banks have also significantly loosened monetary conditions to ease financial market stress and help maintain the flow of credit to firms. The key measure of success for policy makers globally will be avoiding any significant longer-term damage to their economies.
While the economic implications of the crisis are as yet to early to predict, according to many forecasters, including the IMF, a global recession now appears a near certainty. This is supported by recent survey evidence showing national lockdowns behind record declines in activity in the US, UK and Euro Area. The immediate impact on workers is also increasingly stark, with claims for income support spiking higher across countries, raising fears about surging unemployment. Most official data will remain less timely for now. So, alongside surveys, close attention should be paid to officials and Q1 business updates to gauge the economic impact.
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None of the information in this article is, nor should be construed as financial advice. All foreign exchange transactions involve risk and you should always seek your own independent financial advice before entering into any foreign exchange transaction.