Since the World Health Organization (WHO) first declared Covid-19 a world health emergency in January 2020, the virus has been detected in over 150 countries and all U.S. states. The infection has sickened more than 490,000 people, with thousands of fatalities.
More than 80 countries have closed their borders to arrivals from countries with infections, ordered businesses to close, and instructed their populations to self-quarantine. After a delayed response, central banks have engaged in a series of interventions in financial markets and national governments are announcing spending initiatives to stimulate their economies.
On March 11, the WHO announced that the outbreak was officially a pandemic, the highest level of health emergency. It has become clear that the outbreak is negatively impacting global economic growth. The global pandemic is affecting a broad swath of international economic and trade activities, from tourism, medical supplies and other global value chains, consumer electronics, and financial markets to energy, food, and a range of social activities, to name a few.
Without a clear understanding of when the global health and economic effects may peak and some understanding of the impact on economies, forecasts must necessarily be considered preliminary. Efforts to reduce social interaction to contain the spread of the virus are disrupting the daily lives of most Americans and adding to the economic costs.
The Organization for Economic Cooperation and Development (OECD) on March 2, 2020, lowered its forecast of global economic growth by 0.5% for 2020 from 2.9% to 2.4%, if the economic effects of the virus peak in the first quarter of 2020. If the effects of the virus do not peak in the first quarter, as now seems unlikely, the OECD estimates that the global economy could only grow by 1.5% in 2020. On March 23, 2020, OECD Secretary General Angel Gurria stated that:
The sheer magnitude of the current shock introduces an unprecedented complexity to economic forecasting. The OECD Interim Economic Outlook, released on March 2, 2020, made a first attempt to take stock of the likely impact of COVID-19 on global growth, but it now looks like we have already moved well beyond even the more severe scenario envisaged then…. the pandemic has also set in motion a major economic crisis that will burden our societies for years to come.
Concerns over economic and financial risks have whipsawed financial markets as investors have searched for safe-haven investments, such as the benchmark U.S. Treasury 10-year security, which experienced a historic drop in yield to below 1% on March 3, 2020.
The yield dropped again to historic levels on March 6, 2020, and March 9, 2020, as investors moved out of stocks and into Treasury securities due in part to concerns over the impact the pandemic would have on economic growth and expectations the Federal Reserve would lower short-term interest rates for a second time in March 2020.
In overnight trading in various sessions between March 8, and March 24, U.S. stock market indices moved sharply (both higher and lower), triggering automatic circuit breakers designed to halt trading if the indices rise or fall by more than 5% when markets are closed.
By March 19, 2020, investors were also moving out of corporate and municipal bonds, a traditional safe-haven investment, as firms and other financial institutions attempted to increase their cash holdings.
Compared to previous financial market dislocations in which stock market values declined while bond prices rose, stock and bond values fell at the same time in March, 2020 as investors reportedly adopted a “sell everything” mentality to build up cash reserves.
Financial markets from the United States to Asia and Europe are volatile as investors are concerned that the virus is creating a global economic and financial crisis with few metrics to indicate how prolonged and expansive the economic effects may be.
Between February 14, 2020 and March 23, 2020, for instance, the Dow Jones Industrial Average (DJIA) lost about one- third of its value. Expectations that the U.S. Congress would adopt a $2.0 trillion spending package moved the DJIA up by more than 11% on March 24, 2020.
For some policymakers, the drop in equity prices has raised concerns that foreign investors might attempt to exploit the situation by increasing their purchases of firms in sectors considered important to national security. Ursula von der Leyen, president of the European Commission, urged EU members to better screen foreign investments, especially in areas such as health, medical research and critical infrastructure.
Similar to the 2007-2009 global financial crisis, central banks are implementing a series of monetary operations to provide liquidity to their economies. These actions, however, may not be viewed entirely positively by all financial market participants who question the use of policy tools by central banks that are similar to those employed during the 2008-2009 financial crisis, despite the fact that the current and previous crisis are fundamentally different in origin.
During the previous financial crisis, central banks intervened to restart credit and spending by banks that had engaged in risky assets. In the current environment, central banks are attempting to address financial market volatility and prevent large-scale corporate insolvencies that reflect the underlying economic uncertainty caused by the pandemic.
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