Sun 08 March 2020:
Why a shock US central bank rate cut may not be enough to save the global economy from the coronavirus outbreak.
The world’s factory has been shuttered, supply chains have been broken, flights have been grounded and tourism decimated.
That’s the real-world consequence of the coronavirus and the epidemic has yet to peak outside of China.
Growth could halve this year to 1.5 percent, the OECD warned in its worst-case scenario for the outbreak, a growth rate generally considered to indicate a recession.
As markets crashed, central banks stepped forward to say they were ready to support growth. The Federal Reserve cut rates by 0.5 percentage points, its first emergency cut since the financial crisis in 2008.
Whether central banks have the firepower after more than 700 interest rate cuts and trillions in bond-buying after the financial crisis is another question.
And after all that, it was the stock markets that benefitted the most from rate cuts with little trickling down into the real economy.
Unlike the 2008 crisis, where banks needed a desperate infusion of cash after they lost a bet on subprime mortgages, this time, they need governments to step forward to stimulate the economy.
Governments may need to find money to bail out airlines; the industry stands to lose $113 billion in revenue. The World Bank has pledged $12bn and the IMF has set aside $50bn, pledging to help poor countries where health systems are weakest, including providing emergency funding.
Bilal Hafeez, CEO of Macro Hive, says he thinks the “chances are very high that we are indeed heading for a global recession”.
Rajiv Biswaz, executive director and Asia-Pacific Chief Economist at IHS Markit, adds that a scenario in which the world experiences a recession really depends on how much coronavirus spreads globally.
“Clearly now we have very substantial escalation in South Korea, Iran and also Italy. So it is certainly a growing risk that we could see this escalating into a pandemic that affects the whole world economy and that could destroy global consumption, and in that kind of scenario, there is certainly a risk that it could evolve into a global recession,” Biswaz said.
Source: Al Jazeera News
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