Stock markets are freaking out about the spread of Covid-19, the disease caused by a new coronavirus. Should we panic too?
On the surface, the market reactions are grim: Global equities had their worst week since 2008, as traders dumped everything that smells risky. That’s because the full consequences of the virus, which the World Health Organization warns could reach most if not all countries, are still unknown. Supply chains are being disrupted and public gatherings are being canceled, which can filter through to spending and investment.
There’s mayhem in markets, but the shock isn’t comparable to the financial crisis in 2008. Back then, panic in the credit system cut off lending, causing the global economy’s gears to stop turning. The past few days were different. In the US, an overheated stock market—shares were at a record high last week—started coming to terms with the possibility of slower economic growth. Risks are still lurking, but banks have been fortified.
The coronavirus outbreak isn’t likely to spark a recession in most developed countries but, according to economists, they are far from invincible. Italy and Germany’s economies were barely growing before the virus fears spread. China’s had already been hit by the trade war. A slump is possible in the US, says Allison Schrager, a senior fellow at the Manhattan Institute, but not yet probable.
Much depends on whether authorities are able to contain the virus, and the resilience of the world’s economy as the disruption intensifies.
The US has some momentum and room to maneuver, but its options are limited. The Trump administration is looking at $1 trillion budget deficits, leaving it little room to cushion a downturn through spending. The Federal Reserve can cut interest rates to goose the economy, but rates aren’t much above zero. Central banks in Europe and Japan have even less firepower.
That doesn’t mean it’s time for us to panic. But it shows there’s little margin for error, which is why traders hit the sell button.
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