Traditional financial theory suggests that a recession is two consecutive quarters of negative growth in a nation’s gross domestic product (GDP). The underpinnings of these types of economic downturns vary. Typically, a recession is attributed to commodity pricing instability, market crashes, inflation, or extraordinary events.
Although the official verdict regarding the economic impact of the coronavirus (COVID-19) will not be known until Q3 and Q4 2020, many in the financial world are anticipating a global recession. Are they correct? Let’s take a look at what a global recession is and whether the COVID-19 virus will be a catalyst for the world’s next recession.
What Is a Global Recession?
In the last decade, the U.S. National Bureau of Economic Research (NBER) has challenged the traditional definition of a recession. According to the NBER, a recession is best described as follows:
“A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale retail sales.”
Given the parameters of the NBER’s definition, recessionary cycles are a fairly common occurrence on a country-by-country basis. However, they are scarce on a global scale. The International Monetary Fund (IMF) states that there have been only four such events since World War II. In contrast, from 1960-2006 there were 122 recessionary cycles, spread across 21 advanced economies.
U.S.-China Trade Relations
Going into the novel coronavirus pandemic, trade relations between the U.S. and China weren’t in the best of shape. A multiyear tariff battle had put the brakes on commerce and heightened tensions between the nations. Given that U.S.-China two-way trade is worth an estimated $659.8 billion annually, any further disruption would have widespread implications.
Regional quarantines, restricted travel, and the suspension of normal business operations in the U.S. and China posed unique uncertainties. Massive selloffs in the U.S. and Chinese equities markets ensued, as did a rapid devaluation of such commodities as crude oil, live cattle, and lean pork. Ultimately, the COVID-19 outbreak added pressure to the world’s economy in two key fashions:
- Lagging Chinese demand: Financial experts predicted upwards of a 50 percent reduction in China’s GDP growth for 2020. Because China is the world’s largest consumer economy, the expected downturn was to hamper Chinese consumption and global economic growth significantly.
- Technology production: China plays a leading role in the production of technology components. In the wake of COVID-19, Apple, Google, and Microsoft looked to mitigate the negative impact on business by moving operations out of China.
Questions surrounding China’s economic health threatened to destabilize the pricing of assets around the world. Massive plunges in West Texas Intermediate (WTI) and North Sea Brent (BRENT) crude oil futures brought talk of an international recession to the forefront. To make matters worse, supply chain concerns led to a swift repricing of blue-chip technology stocks. The result was a decline in the NASDAQ 100 index of more than 28 percent from late February to mid March.
Will the COVID-19 Pandemic Bring on a Global Recession?
The onset of the early 2020 novel coronavirus pandemic prompted many financial heavyweights to declare a global recession to be inevitable. In fact, investment banks Goldman Sachs and Morgan Stanley declared one to be already underway in mid March.
So will the coronavirus outbreak be the catalyst for the fifth global recession since the 1940s? Mid-March estimates from international financier Deutsche Bank point to yes:
- Q1 and Q2 GDP declines will “substantially exceed anything previously recorded going back to WWII.”
- “China will see its economy shrink by 31.7% in Q1 before a sharp rebound in the following three month period.”
- “The U.S. economy will slump by 12.9% for Q2.”
The consensus among economists at Goldman Sachs, Morgan Stanley, and Deutsche Bank paint a bleak 2020 international economic picture. Conversely, analysts at JP Morgan saw the mid-March COVID-19 pandemic and financial panic in a different light:
- “In our view, the market has priced in too severe of an adverse scenario, assuming a timely and strong counter-policy response.”
- “Historically, a market sell-off of this magnitude implies a 65% to 70% chance of recession in the next 12 months.”
Even during stable economic times, correctly predicting the onset of a recessionary cycle is a tricky business. When attempted within the context of an unprecedented market driver such as COVID-19, it may prove impossible. However, the financial community consensus suggests that a prolonged crisis similar to 2008 may be in the offing. Ultimately, only time will tell.
During Trying Times, the Guidance of Market Pro Is Beneficial
Navigating COVID-19 market turbulence is a job that shouldn’t be taken lightly. The financial markets have reacted violently to the external stimulus, with asset classes across the board being aggressively re-evaluated. Subsequently, a period of extreme volatility has faced active traders and investors.
During challenging times, it never hurts to seek counsel from an experienced, knowledgeable market professional. For ideas on how to prosper during the coronavirus storm, check out Daniels Trading’s Trading Advice portal.