The global economic crisis ahead
The economist Nuriel Roubini, who predicted the financial crisis of 2008, listed the common misconceptions associated with the coronavirus that were common in the market. In his opinion, the belief in a speedy recovery of the global economy after defeating the epidemic is absurd, and hopes for China's rapid growth resemble the Goldilocks tale.
Investors are “fooling themselves” in assessing how acute the economy will be with the coronavirus, said American economist Nuriel Roubini. He said that when investors panicked the sale of assets, the reaction of the stock markets to the outbreak was "soft." Contrary to the reassured investors, “the worst is yet to come,” he emphasizes.
The economist, who became widely known after predicting the global crisis of 2008, named the four main “delusions” of investors regarding the disease. These erroneous assumptions, he said, led to the fact that in late January, despite the spread of the disease, US stock markets rose to new highs.
1. The epidemic is no longer limited to China
“It is becoming obvious that this is a global pandemic, not an epidemic concentrated in China. We also still do not know how many countries in Asia and other parts of the planet will face sharp outbreaks - most likely, there will be many more, ”Roubini writes. According to recent data in the world recorded 594,039 cases of infection with coronavirus and 27,217 deaths due to it.
2. The spread of the virus will stop by the second quarter
“The idea that a peak in economic impact will be reached before the end of the first quarter seems very unreliable,” says Roubini. “China has suffered massive damage, and international supply chains have been severely disrupted.” China now accounts for about 20% of global GDP, not the tiny 4%, as during the 2003 SARS [severe acute respiratory syndrome] epidemic. Add to this the economic shock for large economies like Japan, South Korea, and Italy. When the disease spreads to other developed and developing markets, the damage will increase. ”
3. The global economy after the victory over the virus will begin to grow sharply
“The idea of a V-shaped recovery model is absurd. Suppose that everything goes according to the best scenario in the spirit of the Goldilocks tale: the shock for the Chinese economy persists only in the first quarter, and the infection is mainly limited to the territory of this country. Even if [Chinese] production decreases by only 2% in the first quarter, it is a decrease of 8% in annual terms. This means that the V-shaped recovery will require annual GDP growth above the 6% that the Chinese economy demonstrated before the virus appeared. ” Roubini stresses that faith in the Chinese economy’s ability to grow by 4% per quarter is “heroically optimistic.”
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The economist adds that "global business confidence will also weaken." “Last year, companies reduced capital costs, as senior executives waited until the risks associated with the US-China trade war and Brexit disappeared. With the partial disappearance of these residual risks, capital expenditures will be delayed further due to the desire to wait and see how acute and widespread the spread of the virus is. ”
4. Regulators will protect markets from consequences
“The expectation that politicians will quickly come to the rescue is also a mistake. Fiscal authorities will respond very slowly or will not respond at all, given political and other constraints. Central banks run out of ammunition: how much more negative can the rates of the European Central Bank, the Bank of Japan and others become? The US Federal Reserve has only about 1.5 percentage points left. The Fed is likely to respond by cutting rates in the second quarter, which will lead to short-term relief in the market. But the outbreak of coronavirus is primarily a negative shock in terms of supplies, which slows down [economic] growth, as well as increases costs and inflation, and this cannot be resolved with the help of monetary policy.”
According to Forbes