With COVID-19 infected cases increasing 13-fold and the number of affected countries tripling in the previous two weeks, the World Health Organization (WHO) officially characterized COVID-19 as a pandemic on 11 March, and is the first pandemic caused by a coronavirus. With the world now reporting more new cases each day than China did when the disease peaked in the country, the number of COVID-19 cases crossed 150,000 in more than 140 countries and territories as of 15 March. The WHO has indicated that the epicenter of the outbreak has shifted to Europe with Italy reporting the most cases outside of China.
Policymakers have their work to do
Citi analysts did not view the world economy as highly vulnerable to contraction apart from the virus. Global health crisis have typically seen a short-term negative impact on markets followed by a substantial rebound thereafter. However, with economic vulnerability high, the concoction of shocks from containment measures, persistent uncertainty, financial market turmoil and unprecedented oil price collapse lead Citi analysts to believe that global growth could potentially be dragged down close to 0.0% in 2020.
The extent of damage from COVID-19 depends importantly on the health of credit and banking activity once the temporary effects of the pandemic play out. Citi analysts continue to believe that a targeted fiscal policy of “disaster assistance” is needed to “bridge” the economic disruptions in order to minimize lasting impact.
Heightened volatility in equity and credit markets
Since OPEC and Russia shocked markets with a failure to agree on oil supply cuts, global fixed income markets have seen bid-off spreads widening with liquidity worsening. With this backdrop, the US Federal Reserve cut its rates on 15 March to the zero lower bound and has also announced a large QE program, pledging to purchase $500 billion in Treasuries and $200 billion in Mortgage Backed Securities.
Prior to the recent oil shock, credit markets had not weakened as significantly as equity markets. Now, equity markets appear to be falling on the additional weakness in safer assets. Citi analysts view the near-term outlook as quite challenged, but our confidence has increased somewhat that policymakers are now awakened to the risks.
Citi analysts do not expect a major negative credit cycle as existed in 2008. Globally, bank equity capital raising in the post-global financial crisis period sharply reduced the risk that declines in lending would sharply exacerbate an economic shock.