#COVID-19 pandemic will exacerbate global fragmentation and economic freezing

| March 24, 2020

US President Donald Trump announced on 11 March that the United States will suspend travel to from all European countries except Britain for a period of 30 days from 13 March. “After consulting our senior government health officials, I decided to take some strong but necessary actions to protect the health of all Americans. To prevent new cases from entering our shores, we will suspend all travel from Europe to the United States within the next 30 days.” Trump said in a White House speech. The new rules take effect on Friday night (27 March). On the day Trump spoke, there were more grim occurrences around the world about the new Coronavirus outbreak, writes He Jun.

The World Health Organization announced that the novel coronavirus (COVID-19) crisis is a global “pandemic” meaning that the virus epidemic has spread globally. As of 11 March, more than 115,000 people worldwide have been infected with the virus and more than 4,200 people have died from it. Over the past two weeks, Trump has tried to downplay the risks posed by COVID-19, initially assuring Americans that the number of cases is “declining”. But this is obviously not the case. As of March 11, a total of 1,209 confirmed cases occurred in 41 states in the United States with 37 deaths. On 11 March, Arizona, New Mexico, Louisiana, Arkansas and Washington, DC all issued statements declaring a state of emergency. For the time being, twenty-four states including Washington, DC in the United States have declared a state of emergency.

As the global economy shrinks and the epidemic spreads globally, global capital markets are in turmoil. The U.S. stock market suffered another bleak day on 11 March. The Dow Jones Industrial Average fell another 1646 points (a drop of 5.86%) to 23553.22 points (the Dow fell another more than 1970 points on March 12, a drop of more than 8%). The Dow Jones Index is currently in a bear market. Compared with the February high, the Dow has fallen more than 20% so far.

Following World Health Organization (WHO) announcement of COVID-19 as global pandemic, the U.S. announces suspension of all European travel except UK. Although this is only a node in the development of the global economy and the spread of the pandemic, this move will undoubtedly bring new impact on the global market as the United States has the greatest influence in global economic and financial markets. With the spread of COVID-19 and the escalation of prevention and control in the United States, coupled with this suspension of travel with Europe, it will undoubtedly worsen the global economy and cause a series of chain reactions.

Researchers at ANBOUND Consultant believe that the future global economy and capital markets may face multiple impacts.

First, the United States feels a real threat from the spread of the disease. Interrupting European travel will further disrupt the world’s communication, making the world to descend into a state of fragmentation and partial “freezing.” In the early stages of the epidemic, China was the main victim of travel isolation for various countries. As the epidemic spreads across the globe, countries have begun to isolate each other based on the development of the epidemic. Outside China, South Korea, Japan, Saudi Arabia, the United Arab Emirates, the United States, Italy, Singapore, Ukraine, North Korea and other countries have announced various levels of isolation measures and travel bans. The world has descended into an unprecedented state of chaos created by mutual isolation. This unprecedented isolation, apart from having a direct and visible impact on travel, trade, logistics, supply chain, consumption and other fields, will also greatly affect the mentality of the capital market. It can also affect the flow of global funds and the financial markets.

Second, it can aggravate panic on the global capital market. The global capital market adjustment will continue and the global stock market will further decline. This will trigger a new round of financial crisis. It is worth noting that after Trump’s speech, the three major U.S. stock index futures continued to fall and the Nasdaq futures triggered a circuit-breaker. At the same time, European stock futures plummeted. European Stoxx 50 index futures fell 7.3%, German DAX index futures fell 6.15% and British FTSE 100 index futures fell 6.14%. On March 12, the Asia-Pacific stock market fell across the board, the Australian ASX200 index fell more than 7%; the Nikkei 225 index fell more than 5%, the Japan Topix index fell 5%; and the South Korean KOSPI index fell more than 4.5%.

Third, the global supply chain will be further disrupted and will develop from partial disruption to systemic disruption.

It is different from the blocked supply chain caused by the unavailability of China’s production supplies at the early stage of the epidemic. Now the situation of blockades and isolations faced by the world has exacerbated the overall disruption of the global supply chain. This will cause a very unfavorable “second blow” to China — even if China has successfully controlled the Covid-19 epidemic and most factories have resumed work and production. However, due to blocked international market demands, blocked logistics and blocked international businesses and travels, the global supply chain has been completely interrupted outside of China. It will result in undelivered products manufactured in China, unsold products and uncollected money.

Fourth, the global economy will be further dragged down and the global economic and economic expectations of major countries will inevitably face downward adjustments. The OECD has recently lowered its global economic growth expectations. Assuming that the pandemic is controlled at the current level, world GDP growth can only reach 2.4%. If the pandemic continues to expand, global GDP growth will slow to 1.5% in 2020. The Institute of International Finance (IIF) also issued a warning before, predicting that the global economic growth in 2020 may be close to 1%, far lower than the 2.6% growth in 2019, the lowest growth rate since the financial crisis. According to UBS estimates, the global growth rate before the outbreak of Covid-19 is expected to be 4% and is 2.8% before the collapse of OPEC+ conference talk. With the launch of the “global pandemic” boots, UBS expects the global growth rate to drop to 2.3% in 2020, and the economies of the eight countries will fall into recession. Obviously, with the escalation of global epidemic prevention, control and isolation of various countries, the impact on the global economy will rise and the negative impact on China’s economy will become more serious.

Final analysis conclusion

The COVID-19 outbreak has become a global pandemic. Many countries have responded strongly to this, which objectively led to the fragmentation of the global market and has also frozen up the local economic. The global economy and financial markets will face significant downward adjustments. A global financial crisis different from the one in 2008 has now arrived.

He Jun is partner, director and senior researcher of the China Macro-Economic Research Team. His research field covers China’s macro-economy, energy industry and public policy.

 

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