The Tribune

ACTIVTRADES WEEKLY

By Ricardo Evangelista

www.activtrades.bs

The coronavirus is now infecting and killing a growing number of people across the globe, with an increasing number of countries imposing draconian containment measures that are severely impacting the economic growth prospects of the world's economy.

The impact is felt in two ways. Firstly through a reduction in supply, as the global chain is affected by the closure of factories due to the quarantining of workers and other containment measures. Secondly the demand for goods and services drops due to restrictions imposed by authorities coupled with the fear consumers have faced with such an uncertainty situation. Major spending plans are put on hold.

The drama of the situation is reflected in the abysmal figures for new car sales in China, which recorded an unparalleled drop of 80 percent in February.

Another provider of catchy headlines, over the last week, has been oil. The steep decline in the price of the barrel of crude is nothing but seismic; in less than a week it fell from $46 per barrel to just above $31, a drop of more than 30 percent. But why did this happen? It has been a perfect storm; on one hand, coronavirus undermined oil demand, especially in China, the world's number one buyer, while at the same time US shale production surged to an all-time high.

The coup-de-grace on oil was delivered by Saudi Arabia and Russia. The two OPEC plus members are the globe's top exporters and crucially failed to agree on how to deal with the sudden surge in the availability of oil, engaging in a game of dare - through price cuts and further increases in production - that ultimately led to the sharpest price drop since 1991 at the time of the first Gulf war.

The combination of the collapse in oil price and the apprehension that was already felt by investors over the fallout from the coronavirus crisis, created a sense of panic in the markets, compounded in the last few days, by the exacerbation of the health situation in several countries and the lack of decisive action from European and American authorities.

Donald Trump disappointed many when he spoke to the nation and announced a ban on European travellers, labelling the virus as foreign. This led to a debacle in stock exchanges and a general depreciation of risk related assets during Thursday, March 12, as the markets expressed their dismay at the belligerent tone adopted by the US President.

Concerted international co-operation may be the only way to diffuse the sense of panic that is starting to dominate the markets and economic agents around the globe.

Measures of stimulus, that go beyond ultra-accommodative monetary policies and include concerted global fiscal support are required from international authorities, so that a recession of yet unknown proportions can be avoided.

A crisis such as this one, where both supply and demand are affected, has the potential to create a vicious circle and trigger a long-lasting economic downturn.