Whether or not the coronavirus turns into a global pandemic, the outbreak is already infecting economies and financial markets around the world. While governments try to navigate the fine line between being prepared and setting off panic, the economic costs are growing as countries and communities try to control the spread of the disease.
The hopeful narrative about 2020 heralding a modest rebound in global growth now lies in ruins. Europe stagnated and Japan’s economy shrank in the last quarter of 2019, even as China and India were losing momentum. So this year was already off to a rocky start. Now, the coronavirus has put the world economy in survival mode. The spread of the virus is hurting travel, trade and supply chains worldwide. The Baltic Dry Index, a forward-looking indicator of global trade, has fallen by half and oil prices are down by about a quarter so far this year. U.S. stock markets, after initially taking the epidemic’s fallout in stride, are now experiencing a major sell-off.
Why were stock markets sanguine for weeks after the outbreak began, and why are they now in full-blown panic mode? Financial markets are prone to large, sentiment-driven swings that sometimes seem out of line with economic fundamentals. But the news of the last few days suggests that, rather than coming under control and being confined to China, the outbreak is spreading and could get far worse. Stock markets in the United States and elsewhere are reflecting this reassessment of the epidemic’s future trajectory and the risks it poses.
