The coronavirus is delivering a one-two punch to the world economy, laying it low for months to come and forcing investors to reprice equities and bonds to account for lower company earnings. From one side, the epidemic is hammering the capacity to produce goods as swathes of Chinese factories remain shuttered and workers housebound. That’s stopping production of goods there and depriving companies elsewhere of the materials they need for their own businesses. That supply shock was initially viewed as a short-term disruption, easily reversed once the virus was brought under control. Hence the initial predictions that global growth would follow a V-shaped trajectory, sliding in the first quarter and rebounding in subsequent weeks. Those early bets for 2020 are now in tatters because demand is slumping too. With the virus no longer contained to China, increasingly worried consumers everywhere are reluctant to shop, travel or eat out. As a result, companies are likely not only to send workers home, but to cease hiring or investing — worsening the hit to spending.
How the two shocks will reverberate has sparked some debate among economists, with Harvard University Professor Kenneth Rogoff writing this week that a 1970s style supply-shortage-induced inflation jolt can’t be ruled out. Others contend another round of weakening inflation is pending. The bottom line for central banks and governments is that there’s likely to be even more pressure to deliver economic fixes.
“A classic recession involves a shortfall of demand relative to supply,” David Wilcox, a former Federal Reserve official now at the Peterson Institute for International Economics, said in a report this week. “In that more ordinary situation, economic policy makers know how to help fill in the missing demand. But this case is more complicated because it involves negative hits to both supply and demand.”