Foreign Policy on 'Economic Pandemic' Caused by Coronavirus

An American news publication Foreign Policy has published an article about one of the most serious current challenges of the global economy - new coronavirus, its impacts, and expected negative results.

"The coronavirus now appears to be infecting economies as quickly as it does people," notes the author of the article Keith Johnson, pointing out that traders were hit with a global market rout on Monday, fueled by crashing oil prices and mounting worries over the impact of the coronavirus. 

"An oil price war is fueling a broader, global market rout as investors are increasingly panicking over the economic impact of the COVID-19. Meanwhile, yields on long-term U.S. government debt—a port in a storm for nervous investors—fell to all-time lows, a clear indicator of a looming recession that could come more quickly than many experts feared," reads the publication. 

Oil prices plunged about 25% in New York and London, dragging down stock markets in Europe and Asia. In New York, stocks fell 1,800 points within minutes of the opening bell before trading was briefly suspended, and traded well down the rest of the day, with the Dow Jones Industrial Average finishing down 2013.76 points or nearly 8%, the worst single-day drop since the financial crisis of 2008.

The article quotes Richard Baldwin, a professor of international economics at the Graduate Institute in Geneva: “This virus is as economically contagious as it is medically contagious. It amounts to a triple whammy for the manufacturing sector in most major economies: outright closures in many Asian plants, supply chain disruptions all over, and topped off with a plunge in demand for cars, electronics, and many other manufactured goods as people take a wait-and-see attitude to the crisis."

“This one is economically big because it is now hitting the big economies,” Baldwin said. “The size of the economic shock is a different order of magnitude than any pandemic we have seen.”

The author of the publication notes that the fear now gripping financial markets reflects a recognition of this growing economic impact, as "The coronavirus, which had already disrupted factories and trade in China and across East Asia, is now wreaking havoc in Europe."

"While US President Donald Trump initially dismissed concern over the virus and its impacts as “fake news,” some economists are predicting that the aftershocks could send the world’s biggest economy into a recession this year. With Trump facing re-election in November, the president, Vice President Mike Pence and their advisers held a news conference after markets closed Monday to layout further efforts to contain the virus domestically and to ease the economic pain of Americans who might be affected, including a payroll tax cut. The president said he would announce “major” measures on Tuesday after consulting with Congress," the article further reads. 

“This blindsided the world and I think we handled it very, very well,” Trump said.

The author emphasizes the fact that the economic fallout of the virus is making clear just how interdependent the global economy really is, despite years of efforts by Trump to partially undo globalization by forcing companies to move supply chains out of China and restricting trade in certain critical sectors.

"What’s not yet clear is whether the ultimate fallout of the virus will be to accelerate the breakdown of globalization, sending firms scurrying to bring manufacturing back home so as to avoid these kinds of disruptions or just the opposite," she concludes. 

“In the longer run, it could encourage more populism and undo these value chains,” Richard Baldwin said. “Or it might be that we finally understand that if somebody gets sick in China, it’s a problem for all the G-7 countries” and end up boosting multilateral cooperation and coordination."

The article states that Monday’s bloodbath on the global markets was a timely reminder of how the real-world economic impacts of the virus, the oil market, geopolitics, and the global market panic, are all closely linked.

Because of the physical disruption to global economic activity, forecasters expect global oil consumption to decline this year, for the first time since the financial crisis a decade ago. On Monday, the International Energy Agency said it expects global oil demand to fall by almost 100,000 barrels a day—compared with expected growth of more than 800,000 barrels before the outbreak. That collapse in demand comes amid a massive oversupply of oil. 

“The situation we are witnessing today seems to have no equal in oil market history,” International Energy Agency Executive Director Fatih Birol said.

The publication mentions that last week, big oil producers, led by Saudi Arabia, thought they had found a way to limit the fallout from that declining demand by cutting oil production, which would have helped prop up prices. But Russia declined to go along with the production cuts, preferring to inflict pain on the still-growing U.S. oil industry instead.

"Once that Saudi-Russian agreement broke down on Friday, all bets were off: Over the weekend, Saudi Arabia dramatically cut the sales price of its own oil exports, sending the price of oil down as much as 30 percent in overnight trading, which in turn scared the pants off markets in Asia, Europe, and finally the United States, which in turn sent investors fleeing toward safe debt like U.S. Treasury bonds," the source reads.

"Understanding Saudi Arabia’s plan to slash prices and ramp up production is a little trickier. Like Russia, it bristled at competition from U.S. oil producers and wasn’t happy that its rivals would benefit from higher oil prices bought with its own sacrifices. But prices were already sliding after OPEC failed to reach an agreement last week; it’s not clear that starting an all-out price war will make Russia regret its decision to ditch Saudi cooperation last week at the OPEC meeting and sign on to a fresh pact to curb output," the author notes. 

“If the goal is to shock Russia with weak oil prices in order to drag Moscow back to the table, we think it will fail,” noted Amrita Sen, the chief oil analyst at Energy Aspects, a consultancy, in a note. “This new Saudi approach will only harden Russia’s position.”

The author assesses the move as "another risky gambit from Saudi Arabia’s de facto leader, Crown Prince Mohammed bin Salman," as Saudi Arabia needs crude prices closer to $80 a barrel to balance its budget. "It’s also got fewer currency reserves and more public spending than it did in 2014, the last time OPEC crashed oil prices to drive out U.S. rivals."

“Saudi Arabia can afford to wait out low oil prices. But, there is little to suggest that Riyadh is in a better position now than in 2014 to absorb sustained low prices,” said Torbjorn Soltvedt, the principal Middle East and North Africa analyst at Verisk Maplecroft, a risk consultancy.

"And lower oil prices will also mean more economic pain for other big producers, from Iraq to Mexico to Brazil," the author of the article concludes, noting that the immediate pain was felt in the US oil patch, where shares in many energy companies fell by nearly half on Monday, outstripping even the wider carnage in the rest of the market.

"With oil prices headed lower, some producers wasted no time in announcing cuts to drilling and production plans. Most analysts expect a wave of bankruptcies and restructuring to tear through the U.S. shale sector if low oil prices persist—which could end up being an economic black eye for Trump in traditionally red states in an election year."

Source: foreignpolicy.com

Author: Keith Johnson

Photo: TIMOTHY A. CLARY/AFP/GETTY IMAGES

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