Fears extend from recession to depression


  • Economy
  • Tuesday, 31 Mar 2020

In all this, it is more important to fight and stop Covid-19, and more resources should be directed to the centre of the storm, said Areca Capital CEO Danny Wong (pic).

AN eerie depiction of baby coronaviruses gleefully on a world tour bus “Corona Express” which is speeding downhill, points to the rapid destruction caused by this pandemic.

With cases still mounting in Europe and the United States, there are increasing fears of a global recession possibly leading to a depression.

The aggressive flooding of money and stimulus into markets and economies, may now seem ample and sufficient.

But fresh crises can break out from odd corners of the markets.

Real estate investment trusts, that invest in real estate property, is an area to watch as rents are falling or not being paid.

Fundamentals for the aircraft and airline industries have been so irretrievably damaged, that investors may not buy their stocks as they may not be able to pay out distributions.

Following the poor data for March, will the numbers tank further as businesses and confidence sink in tandem?

There may be no end to the printing of money but will the momentum be spiraling downwards too fast, as government departments and health facilities become increasingly strained as they struggle to cope with the load?

In the United States, the record US$2 trillion stimulus package is reassuring but there are already cries for help to arrive quickly, before many small businesses collapse.

Whether a global depression sets in depends on how long and deep this period of unemployment and reduced output would be, as the world races to find a vaccine for the coronavirus.

As infections in the United States exceed 100,000, and deaths double in two days to 2,000, the virus has also spread to states with low income populations.

Guggenheim Partners chief investment officer Scott Minerd sees a 10% to 20% chance of a global depression as the shocks spiral in markets and the broader economy.

The Great Depression, which began after the stockmarket crash in October 1929, saw high unemployment in the United States, and lasted until the late 1930s.

Not even during the Great Depression and World War II did the major part of economic activities shut down like it has in China, the United States and Europe, wrote professor at Stern School of Business, New York University, Nouriel Roubini, in his Project Syndicate column.

In just a week, more than three million Americans were rendered unemployed by the pandemic.

In contrast to the previous record for US unemployment claims of 695,000 in 1982, this historic surge has put an abrupt end to a decade long expansion that the Federal Reserve had tried so hard to sustain.

With US consumer spending sluggish in February, consumer sentiment dipped to a 3½-year low in March, indicating the possibility of a deep recession.

At 89.1 compared with 101.0 in February, this represents the largest monthly drop in the University of Michigan’s consumer sentiment index.

The US services and manufacturing sectors fell sharply in March, with IHS Markit’s flash services purchasing managers’ index declining to a record low of 39.1 against 49.4 in February, and the index for domestic manufacturing dropping to 49.2 from 50.7 in February, representing the lowest level since 2009.

With plunging numbers also recorded in the eurozone, Britain, Australia and Japan, economists see the near term outlook as “terrible, ” and predict a severe downturn in the first half.

Within a week, Goldman Sachs had changed its forecast for growth from 5% to 24% in the second quarter, as a “sudden surge in layoffs and collapse in spending” appear to be “historic in size and speed.”

US unemployment is expected to skyrocket from a 50-year-low of 3.5% to 9%, which would be near the peak of 10% in the great recession of 2009.

Retail sales in China plummeted 20.5% year-on-year in January and February, when the Wuhan lockdown began; declines were seen in all categories.

Within barely a month, the International Monetary Fund has changed its forecast for world growth to go below the 2.9% recorded for 2019, to a “recession (that is) at least as bad as during the global financial crisis, or worse.”

Global growth last year, impacted by trade wars, was already at its lowest rate since the decline of 0.7% in 2009.

Just how long this coronacrisis will last is the agonising question, but some are already doing scenario analysis of possible economic recovery, whether it will be shaped like a V (a sharp but brief decline followed by a strong recovery), U (a gradual decline and rise) or L (a steep decline and slow recovery).

In all this, it is more important to fight and stop Covid-19, and more resources should be directed to the centre of the storm, said Areca Capital CEO Danny Wong.

Columnist Yap Leng Kuen sees challenges coming from all directions. The views expressed here are the writer’s own.

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