The world economy might be heading for its worst performance since the financial crisis more than a decade ago as the spread of COVID-19 increasingly dashes hopes of a swift rebound.
Just weeks after most economists bet the China-led slump would quickly reverse once the virus was contained, many are rethinking that optimism as swathes of Chinese factories remain shut and workers idled.
Having already cut supply chains and undermined tourism and trade, outbreaks from Europe to the Americas threaten activity elsewhere, too.
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Bank of America Corp economists on Thursday warned clients that they now expect 2.8 percent global growth this year, the weakest since 2009. They were already penciling in the softest growth in China since 1990, but now say that the US would expand the least in four years.
“The risks are still skewed to the downside,” Bank of America economists led by Ethan Harris said in a report. “Our forecasts do not include a global pandemic that would basically shut down economic activity in many major cities.”
The outlook contrasts with the IMF, who on Saturday last week said it would likely knock only 0.1 percentage point from its global growth estimate of 3.3 percent for this year, although it was studying more “dire” scenarios.
Now the Washington-based fund is reconsidering the scale and scope of policy meetings it was scheduled to host in mid-April. As stocks plunge, companies are also sounding the alert. Standard Chartered PLC on Thursday joined HSBC Holdings PLC in saying that it would miss profit targets because of the virus.
“We remain sensitive to external conditions generally and recognize that these could as easily recover as worsen,” chief executive officer Bill Winters said.
Eager for insight into China’s economy, investors are hotly anticipating today’s release of a key manufacturing gauge. The consensus in Bloomberg’s survey is for the official purchasing managers’ index to slide to 45, the lowest since 2008, from last month’s 50, with forecasts ranging from 50.1 to 33. That underscores the confusion surrounding the virus and how the reading could rock markets.
China still has a long recovery ahead. Bloomberg Economics calculates the economy ran at 60 to 70 percent of normal this week, albeit up from 50 to 60 percent a week ago.
Key central banks are holding off cutting interest rates as they wait to see the full economic effect of the virus with rates already at or near record lows.
There is also a debate over what further easing would achieve. If supply chains are broken, lower rates would likely do little to spur activity.
European Central Bank President Christine Lagarde told the Financial Times on Thursday that it is too soon to respond, echoing comments on Tuesday from US Federal Reserve Vice Chairman Richard Clarida.
In a potential model for others, the Bank of Korea resisted demands to cut rates, preferring instead to target support for companies by making cheap loans easier to get.
However, economists are beginning to join investors in predicting that the major central banks would eventually loosen policy. Those at Standard Chartered on Wednesday told clients that they now expect the Fed to cut its benchmark rate in April and June having previously assumed no change this year.
Money markets already see three Fed reductions this year — starting in April — and one by the ECB by October.
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