Feb 28, 2020 - Economy & Business

The growing coronavirus recession threat

Illustration: Aïda Amer/Axios

In just a matter of weeks, top economists and investment bank analysts have gone from expecting the coronavirus outbreak to have minimal impact on the U.S. economy to warning that an outright recession may be on the horizon.

What's happening: The spread of confirmed coronavirus cases in Europe, the Middle East and the U.S., and the speed at which they are being discovered has set the table for the outbreak to have a larger and much costlier impact.

Between the lines: The outbreak threatens U.S. consumer-oriented businesses like restaurants, bars and travel, which have held up the economy as business investment has turned negative and the manufacturing sector has fallen into recession, largely as a result of the U.S.-China trade war.

What they're saying: Business investment, which declined through the last three quarters of 2019, could be further hit, Constance Hunter, chief economist at KPMG, tells Axios.

  • "If the virus spreads within the U.S. in any meaningful way, that is going to have a negative impact."
  • "That's a component we think could lead to a negative GDP print in the first and possibly the second quarter."

Europe and Japan are particularly at risk, as both have generated only 1% growth over the past year and are very susceptible to falling into recession.

  • “We could see a significant impact on Europe, which has been weak to start with, and it’s just conceivable that it could throw the United States into a recession,” former Federal Reserve Chair Janet Yellen said Wednesday at an event in Michigan.

Flashback: Just a few weeks ago, many economists thought the coronavirus would cause only a tenth of a percentage point decrease in U.S. growth this year.

  • But rosy projections were in short supply on Thursday as the Dow flirted with its largest single-day points drop in history.
  • The S&P 500 has fallen by 10% in just six trading sessions, the fastest correction in history from a record high, Deutsche Bank Securities chief economist Torsten Sløk said in a note to clients.

One level deeper: Goldman Sachs' chief U.S. equity strategist David Kostin warned Thursday that the firm now expects U.S. companies to "generate no earnings growth in 2020,” and that “a more severe pandemic could lead to a more prolonged disruption and a U.S. recession.”

  • Bank of America Securities cut its 2020 global growth forecast, and is now expecting the lowest reading since 2009.
  • Credit Suisse lowered its projection to 2.2% — below the 2.5% growth rate the IMF set as the threshold for global recession.

The big picture: Nearly half of U.S. companies in China said they expect revenue to decrease this year if business can’t return to normal by the end of April, according to a new survey by the American Chamber of Commerce in China, a group representing members from 900 companies throughout the country.

  • One fifth of respondents said 2020 revenue from China would decline more than 50% if the epidemic continues through Aug. 30.

Go deeper

Stock traders expect stimulus to save the day despite coronavirus fears

Illustration: Sarah Grillo/Axios

News about the coronavirus outbreak got worse on Monday, but stock traders saw a stimulus bat-signal in the sky and sent the Dow to its biggest points gain on record — 1,294 points.

Why it happened: Stock prices jumped after it was confirmed that finance ministers and central bank governors from each of the G7 countries would hold a conference call Tuesday morning, presumably to announce coordinated stimulus measures to deal with the coronavirus outbreak.

The global economic threat of the coronavirus

Illustration: Sarah Grillo/Axios

The coronavirus has the potential to be as damaging to the global economy as the U.S.-China trade war, economists tell Axios, and if not contained could wreak havoc on businesses across the globe, with great uncertainty over how bad things could get.

Why it matters: The epicenter of the virus is China, which is now the world's top trading nation and largest commodity buyer, and the no. 1 trading partner for many of the world's biggest economies, including Germany and Japan, which both are suffering already from anemic growth.

The looming global great recession

GDP data: OECD, BoA Global Research; Coronavirus data: The Center for Systems Science and Engineering at Johns Hopkins; Chart: Andrew Witherspoon/Axios

Economists have removed their rose-colored glasses in recent weeks and are beginning to price in scenarios for the world that are as bad or much worse than the global financial crisis.

The state of play: "If you think about the situation going into the financial crisis, I would say all things being equal there was clearly a better ability to react economically … in Europe and in Japan and also in the U.S.," Thomas Holzheu, Americas chief economist at reinsurance giant Swiss Re, tells Axios.