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What has COVID-19 caused to the global economy?

What has COVID-19 caused to the global economy?

Saturday 14, 03 2020
Amid concerns about the impact of the COVID-19 pandemic on the global economy, many financial institutions simultaneously lowered their growth forecasts for 2020.

The complex evolution of the COVID-19 epidemic has become one of the biggest threats to the global economy and financial markets.

First discovered in Wuhan City (Hubei Province, China) in December last year, the current COVID-19 epidemic has spread to at least 110 countries and territories around the globe, causing more than 125,000 people infected and 4,600 deaths. Mainland China is recorded the world's largest outbreak with more than 80,000 positive cases and more than 3,000 deaths. T

o prevent the outbreak, Chinese officials have frozen many cities, restricted millions of people from moving and suspended operations of many businesses.

According to CNBC, these tough actions will slow down the world's second-largest economy and pull the global economy down. The COVID-19 outbreak is spreading worldwide, with new outbreaks such as Italy, Iran and South Korea reporting more than 7,000 positive cases.

A number of other European countries, such as France, Germany and Spain, also saw an increase of more than 1,000 cases. "From an economic perspective, the main problem is not only the number of COVID-19 infections but also the level of disruption caused by epidemic prevention measures to the economies" said Ben May, Head of macro research at Oxford Economics.

"The large-scale blockade measures used in China are also being used in other COVID-19 epidemic outbreaks" May said. The expert also said that if applied in the wrong way, the above measures can cause panic and weaken the global economy.

Global economy to go down

The COVID-19 epidemic has led major institutions and banks to lower the growth forecast of the global economy. One of the latest agencies to implement this move is the Organization for Economic Co-operation and Development (OECD).

In its March report, the OECD said it had lowered its growth forecast for 2020 for most economies around the world.

​​What has COVID-19 caused to the global economy?

According to this report, China's GDP growth witnessed the strongest adjustment. The world's second largest economy is expected to grow 4.9% this year, which is much lower than the forecast of 5.7%.

Meanwhile, the global economy is expected to grow by 2.4% in 2020, down from the previous forecast of 2.9%.

Manufacturing activities dwell

The COVID-19 epidemic has seriously affected China's manufacturing sector.

Caixin/Markit's PMIs for private companies show that China's manufacturing activity shrank in February, hitting a record low of 40.3 points.

​​Manufacturing activities dwell

The slowdown in manufacturing in China has hurt the countries with close economic links with it, many of which are Asia-Pacific economies such as Vietnam and Singapore and Korea. Analysts said that factories in China may take longer to resume production than expected.

This situation, coupled with the rapid spread of the COVID-19 epidemic outside mainland China, indicates that global manufacturing operations may weaken longer.

Service sector hurt

The COVID-19 epidemic also affected the service industry of the country of billions when consumers reduced spending, thereby affecting retail stores, restaurants, airlines, etc.

Caixin/Markit's service PMI in China only reached 26.5 points in February, marking the first time the index had dropped below 50 points since the survey started nearly 15 years ago.

​​Service sector hurt

China is not the only country where the service sector weakened. According to IHS Markit, the US service sector, the largest consumer market in the world, also narrowed in February.

One reason behind the contraction of the US service industry comes from the decline in “operation of new business abroad, when customers withdraw orders in the context of global economic instability and outbreak of COVID-19" IHS Markit said.

Oil prices fell

Weak global economy has reduced demand for oil, bringing oil prices to bottom low for years. This had occurred even before OPEC and its allies (or OPEC +) disagreed over the limit on oil production cut, which has led to the fall of oil prices in recent days.

Analysts from DBS Bank (based in Singapore) said that crude oil demand was down due to the COVID-19 epidemic and the increase in supply was a "double unfortune" for the crude oil market.

Oil prices fell

​China, the heart of COVID-19, is the world's largest crude oil importer. "The spread of the COVID-19 epidemic in Italy and other parts of Europe is particularly worrying and will likely continue to reduce demand in OECD countries" said the analysts of DBS.

Stock market plummeted

Concerns about the impact of the COVID-19 epidemic on the global economy have hurt investor sentiment and caused stock prices in major markets to plummet.

Mr. Cedric Chehab, senior expert at Fitch Solutions, said that there are three ways that COVID-19 can slowly impact on investor sentiment.

Stock market plummeted

​"We have identified three channels where the COVID-19 epidemic could put pressure on the US market, including the slowdown of the Chinese economy, the economic slowdown caused by outbreaks in the US and the tensions in the financial markets" said Chehab.

Government bond yields dropped

Concerns about the impact of the epidemic on the global economy also prompted investors to increase bond prices, thereby pushing bond yields in major economies down.

US Treasury bonds are considered as a haven asset that investors tend to look for in times of volatile markets.

Stock market plummeted 

The yields of all US Treasury bonds fell below 1% in the past week, an unprecedented phenomenon in history. The yield of 10-year US Treasury notes hit a historic low of 0.318%.

​Some analysts predicted a drop in US Treasury yields could cause the Federal Reserve to lower interest rates again.

On March 3, Fed lowered the emergency interest rate by 50 basis points and brought the federal funds rate to the range of 1 - 1.25%.

>> Covid-19 makes 2020 a year of uncertainty for the world economy

Source: vietnambiz

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