The world’s biggest economy is scared
The final weeks of 2019 saw the traditional flurry of analysts and market commentators raising the prospect of so-called black swan events in 2020. Looking back through these notes today, one is confronted with a range of nightmare scenarios ranging from military conflict in the South China Sea to the collapse of a major investment bank and global food shortages caused by climate change.
Other scenarios included Apple buying Disney, the US introducing capital controls and Hillary Clinton bagging a surprise victory in the US presidential election. The closest anyone came to raising fears of a global pandemic was a prediction that China’s swine fever would spread beyond the country borders.
We now know that something far worse emerged from the food markets of Wuhan, and yesterday the US Federal Reserve intervened with its first emergency cut to interest rates since the collapse of Lehman Brothers in October 2008. The Fed’s decision is hugely significant.
The world’s largest economy has looked to the horizon, and shuddered at what it’s seen. Fed chair Jerome Powell said yesterday that the rate cut “won’t reduce the rate of infection, won’t fix a broken supply chain,” but would “provide a meaningful boost by preventing further tightening of financial conditions.”
As of last night, the US markets weren’t responding to his antidote. Attention now turns to the Bank of England, with a swarm of economists now predicting a cut when the Monetary Policy Committee next meets. Just weeks ago, attention was on the run of good economic news — the increased optimism in corporate Britain, the encouraging PMI numbers and gains in wage growth and employment.
The mood music turned against a cut to interest rates here, but the tune appears to have changed. There is now no doubt that the coronavirus will take a bite out of global economic growth, at a time when many countries — including our own — can ill afford it.
Elsewhere, Germany’s economy has been in the doldrums as its manufacturing output slumps. How will it cope with a deeper global slowdown? Japan is already heading straight for recession, and now faces postponing or cancelling the Olympic games as it grapples with the outbreak. What’s more, Japan’s central bank — like the ECB — has exhausted its room for monetary stimulus.
And all the while, fear of the virus spreads faster than the virus itself. Taken together, these twin demons pose a deeply dangerous risk.