This article first appeared in The Edge Malaysia Weekly on March 9, 2020 - March 15, 2020
The sharp decline in global equities and falling bond yields in the last two weeks are telling investors that an economic slowdown and possibly a recession are on the horizon.
Already weakened by the prolonged trade war between the US and China, the global economy has now been hit by the rippling effects of the Covid-19 outbreak that had spread to more than 90 countries, infected 100,257 people and claimed 3,408 lives as at March 6.
The toll on human lives aside, the impact of Covid-19 on economic activity is already evident in China’s Caixin/Markit services sector Purchasing Managers’ Index (PMI) falling to 26.5 in February — its lowest level since the 2008/09 global financial crisis — while the manufacturing PMI fell to 40.3 in February — a record low since the survey was launched in 2004.
Economists warn that what started out as a supply side disruption, given that China is the factory to the world, will eventually affect demand as well. This will arise when people refrain from their usual daily activities, which will affect consumption.
What is also worrying are the phobias and irrational fears gripping communities, which will lead to a further stifling of consumer and business activities as development and investment plans are shelved or put on the back burner.
How long will the outbreak last and how soon will consumers and businesses bounce back? Will it be a U or L-shaped recovery?
Expectation of a V-shaped recovery — as was the case with the severe acute respiratory syndrome in 2003 — has already been thrown out the window. Last Friday, Citigroup strategists said the V-shaped recovery theory is now being challenged as investors see a “far more protracted recovery”.
Perhaps, the inversion in Treasury yield curves — seen as a reliable predictor of recessions — as recently as last month and 2019 could really be telling markets something.
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