News Analysis

International currency exchange. Currency convert,

  • Efforts to control the spread of coronavirus have put the global economy in deep trouble. Major markets were down by over 10% last week.
  • The US has cut rates, and other leading central banks are signalling they are prepared to make cheap money available to help.
  • The rand received a small bump from the Fed rate cut, but markets are skittish.
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In the absence of a vaccine to halt the spread of the novel coronavirus, it‘s not surprising that governments, notably China, have attempted to contain its spread by restricting the movement of its citizens.

But this has come at a huge cost as Chinese data out last week has shown its economy has been dealt a body blow, the official Manufacturing Purchasing Managers' Index for February tumbling to just 35.7 points, the lowest on record and well beneath 45 expected.

China drives global growth. Hitting the brakes is bad for the world economy. The United States’s busiest port, the Port of Los Angeles, said last week it was projecting a volume drop of at least a 25% in March due to the novel coronavirus, a drop of one in four goods imported from Asia.

In the meantime the virus had spread to 50 other major countries and was showing signs of traction in three of them, Italy, Iran and South Korea, suggesting while it did appear that movement controls had slowed its spread in China, the virus appears to be on its way to becoming a global pandemic.

Major markets hit the skids, with the FTSE 100 down 13% on the week, its worst one-week fall since the 2008 financial meltdown, and the JSE lost 11% of its value during the same period.

More than $1.1 trillion was wiped off the value of developing-nation stocks and bonds last week as the economic impact of the coronavirus worsened, Bloomberg reported on Monday.

On Tuesday the US Federal Reserve slashed American interest rates by a half point to a range of 1.0% to 1.25%, with the Federal Open Market Committee saying "coronavirus poses evolving risks to economic activity."

On Friday, before the rate cut, Federal Reserve chair Jay Powell sought to reassure businesses and investors, saying the fundamentals of the United States economy remained strong – but promising to "use our tools and act as appropriate to support the economy" through the coronavirus hit. 

Similar statements from the central banks of England and Japan led investors to believe that a coordinated response was likely.

Also on Monday, the Organisation for Economic Cooperation and Development (OECD) said that “even in the best-case scenario of limited outbreaks in countries outside China, a sharp slowdown in world growth is expected in the first half of 2020 as supply chains and commodities are hit, tourism drops and confidence falters.

“Global economic growth is seen falling to 2.4% for the whole year, compared to an already weak 2.9% in 2019. Broader contagion across the wider Asia-Pacific region and advanced economies – as has happened in China - could cut global growth to as low as 1.5% this year, halving the OECD’s previous 2020 projection from last November.

“Containment measures and loss of confidence would hit production and spending and drive some countries into recession, including Japan and the euro area.”

The Italian government said it would use fiscal measures totalling €3.6 billion to tackle the crisis. It announced tax credits for companies that reported a 25% drop in revenues and said it would put extra cash into the health system.

But just how effective the powder in central banks arsenal will prove to be remains to be seen. Analysts have cautioned for some time now that the relatively low interest rates mean central banks have little ammunition available for the job at hand.

SUERF, the European monetary and finance forum, warned in October last year that while “unprecedented policies will be needed to respond to the next economic downturn, monetary policy is almost exhausted as global interest rates plunge towards zero or below. 

“Fiscal policy on its own will struggle to provide major stimulus in a timely fashion given high debt levels and the typical lags with implementation. Without a clear framework in place, policymakers will inevitably find themselves blurring the boundaries between fiscal and monetary policies. This threatens the hard-won credibility of policy institutions and could open the door to uncontrolled fiscal spending.”

Central banks in emerging economies typically do not have the tools of their low-to-no-inflation peers, but lower interest rates in developed markets have in the past seen investors put money in developing markets in search of higher yield.

The markets, it should be said, were already skittish, one indication of this being that one-third of all government bonds in developed markets have negative yields, meaning investors get less back on their investments than what they put in.

Now there is a new actor to contend with: a virus.

On Tuesday evening the rand received a small boost from the Fed rate cut, moving from R15.60 to the dollar earlier in the day to trade at R15.35/$. It remained at around that level on Wednesday morning.

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