WASHINGTON — As the coronavirus outbreak enters a potentially dangerous new phase, with cases widening in Europe and expected to spread in the United States, economists have begun to raise their estimates for the risk of a global recession and fallout to the American economy.
Economists say the stock market sell-off in recent days reflects a reassessment of the likely magnitude of the hit to corporate earnings in the virus’s wake, suggesting the economic pain could last longer and the recovery may not be as swift as initially thought.
“Businesses of all kinds, in a lot of places, being impaired really (made) me skeptical that this is something that would fade quickly and from which we would recover quickly,” said Carl Tannenbaum, chief economist at Northern Trust in Chicago. “And that realization is now cascading through both to investors and to policymakers that this is a situation that is more serious than initially thought.”
Many American companies rely on overseas sales and production in China for a significant share of their revenue and profits. And a growing number of firms, including Apple, Starbucks and the chipmaker Qualcomm, have lowered their earnings guidance in recent days.
Tannenbaum now sees the Federal Reserve cutting interest rates by a quarter of a point in April. Just a few weeks ago, most analysts expected the central bank would stand pat on rates for the rest of the year.
Fed officials aren’t sounding the alarm bells yet, but they say they’re closely monitoring the situation. And while they don’t want to react to volatile swings in financial markets, deepening losses in stocks could undercut consumer confidence, which, in turn, could cause a retrenchment in spending and push the economy into recession.
“The equity market is central to the U.S. economy,” said Mark Zandi, chief economist at Moody’s Analytics, noting that the large baby boom population is particularly susceptible to a market downturn because they have much of their nest egg in it.
Zandi considered the rapid spread of the virus in Italy as a major turning point, and after Tuesday’s warning from the U.S. Centers for Disease Control and Prevention that infections were bound to increase in the United States, he raised the odds of a global recession to 50%, up from just 20% last week.
“If it goes to a pandemic, then I think the economy is in recession,” he said.
The World Health Organization hasn’t yet classified the outbreak as a pandemic. As of early Wednesday, its daily tracking reported more than 81,000 confirmed cases in more than three dozen countries, with 2,700 deaths, the vast majority in China. The rate of increase in cases is now fastest outside of China.
In fact, China, where the COVID-19 virus was first detected in December, has seen a steady decline in reports of new infections in recent days. And key parts of the Chinese economy, which had been in virtual lockdown, have picked up notably as many operations have resumed.
But even as things look better in China, a surge of new cases in South Korea, Italy and Iran has sparked fears that the economic impact will only widen as other countries, and the companies that operate there, adopt similarly stringent responses to keep the virus in check, such as travel restrictions and temporary closures of factories and businesses.
Even before the virus outbreak, the global economy was smarting from President Donald Trump’s trade wars, uncertainties about Brexit and rising tensions in South America and the Middle East.
Now it looks like several major economies — Japan, Germany, Italy, South Korea — could slide into a technical recession, defined as two consecutive quarters of negative output.
Fed officials seemed unruffled by the stock market declines, or that the yield on the benchmark 10-year Treasury note fell to an all-time low Tuesday as investors fled riskier assets for the safety of U.S. government bonds.
Fed Vice Chair Richard Clarida, speaking at an economic conference in Washington on Tuesday, said that “it is still too soon to even speculate about either the size or the persistence of these effects, or whether they will lead to a material change in the outlook.”
Clarida added that the U.S. economy and the central bank’s monetary policy were both in a “good place,” essentially repeating public comments made by Fed Chair Jerome Powell two weeks ago.
Job growth has been resilient. And the Fed’s low interest rates have given a boost to the housing market and are helping household balance sheets.
At the same time, corporate debts are high, manufacturing remains in recession and business investment is sluggish. Analysts say it’s possible the United States could skirt a recession in a global downturn, but it’ll be close.
Research firm Oxford Economics this week also revised its outlook, writing that “the economic impact to the U.S. and global economy was believed to be mostly contained last week, but rising volatility, plunging stock prices, and a strengthening dollar will likely exacerbate the economic shock on the U.S. economy.”
Even if the world avoids a coronavirus pandemic, Oxford Economics said, the U.S. economy will barely be able to stay above water in the first quarter and growth for the year as a whole was likely to come in at a subpar rate of 1.5%.
One of the biggest threats is interruptions in global supply chains, the network of manufacturers, vendors, distributors and transporters needed to get goods from factories to customers.
IPC, an electronics industry trade group, said this week that manufacturers were already hurting and surveys indicate they are expecting, on average, product shipment delays of at least five weeks.
Said John Mitchell, IPC’s president and chief executive: “The delays will likely have ripple effects for the rest of the year.”