Global Recession Looms With COVID- 19 Outbreak

The odds of a global recession are more likely than not. Investors and analysts, who are always the first to sense it, have punished stocks in a way we have not seen since 2008. The Dow Jones Industrial Average on Monday, had its biggest fall since 2008 and markets like India had record falls.

Savage selling has been the order of the past few weeks in the stock markets, and desperate measures by central banks like the US Fed interest rate cut, have borne very little fruit.

Why a global recession looms?

The problem began in China, which is one of the faster growing larger economies in the world. When it begins in China, there arises a major problem, as it disrupts supply chain, if factories are closed there. This is exactly what has happened over the last few weeks.

Take a look at some of the damage elsewhere. Just imagine, a country like Italy, which is a large European country, being almost shutdown to quarantine an entire nation. Surely, consumption and trade is impacted, which will almost surely impact economic growth. Not to mention another major developed country like South Korea, where the news on infections is pretty bad.

A demand shock is already playing out. Crude prices have plunged like never before, compounded by a disagreement between OPEC and its ally Russia. On Monday, oil plunged as much as 30 per cent, something we have never seen since 2008.

This could have an impact on the highly leveraged shale oil producers, for whom business may become unviable, if crude continues to remain at $35 per barrel.

Unlike some of its predecessors, COVID 19 has hit the developed markets more, and is now causing more fatalities, then either SARS or EBOLA. The infections are also substantially higher than its predecessors.

COVID 19 has also reached as many as 81 countries from the Middle East, Europe to the US.

Falling bond prices suggest a recession

The yield on 10-year U.S. Treasuries fell to 0.5 per cent early this week. It's pertinent to note that it is one per cent below the lowest they got in the aftermath of the financial crisis, which was 1.5 per cent by mid-2012.

Falling bond yields in the US are the clearest sign that a recession is looming.

Central banks are likely to do their utmost by way of easing measures and it has worked in the past. However, in previous cases, it was not a matter of life and death. With the COVID - 19, it actually is.