Business activity collapsed from Australia, Japan and Western Europe to the United States at a record pace in March as measures to contain the coronavirus pandemic hammer the world economy, cementing economists’ views of a deep global recession.
The highly contagious coronavirus, which causes a respiratory illness called COVID-19, has caused entire regions to be placed on lockdown and in some places soldiers are patrolling the streets to keep consumers and workers indoors, halting services and production and breaking supply chains.
“The global health crisis is rapidly morphing into a global recession, as there is a clear tension between preventing infections and ruining the economy,” said Edoardo Campanella, an economist at UniCredit Bank in Milan. “However, a wise policy co-ordination between health and fiscal authorities should allow a V-shaped recovery once containment measures are relaxed.”
Data firm IHS Markit said on Tuesday its flash U.S. Composite Output Index, which tracks the manufacturing and services sectors, dropped to a reading of 40.5 this month. That was an all-time low and followed a reading of 49.6 in February.
Last month’s decline in the index, which is seen as a good measure of economic health, was the largest in the series’ history. A reading below 50 indicates contraction in business activity. The survey underscored the rapidly deteriorating economy, highlighted last week by a government report showing the biggest rise since 2012 in the number of Americans filing claims for unemployment benefits during the week ended March 14.
Economists are predicting claims will accelerate to a record 1.5 million or more when data for last week is published on Thursday.
The message was equally grim from the 19 countries that use the euro. IHS Markit’s flash composite PMI for the euro zone plummeted to a record low of 31.4 in March.
That was by far the biggest one-month fall since the survey began in mid-1998 and below all forecasts in a Reuters poll which gave a median prediction of 38.8.
In France, services activity fell to a record low and manufacturing saw its steepest drop since the global financial crisis more than a decade ago.
A PMI for the services sector in Germany, Europe’s largest economy, showed a record contraction in activity, while sister surveys showed Britain’s economy shrinking at a record pace.
IHS Markit said the March figures suggested the euro zone economy was shrinking at a quarterly rate of around 2%, and the escalation of measures to contain the virus could steepen the downturn.
After an initial outbreak in China brought the world’s second-largest economy to a virtual halt last month, an ever-growing number of countries and territories have reported a spike in infections and deaths, leading to “social distancing” policies aimed at containing the spread of COVID-19.
Goldman Sachs is predicting that the global economy will shrink 1.0% this year, with gross domestic product in China estimated to contract at a 42% annualized rate in the first quarter and GDP in the United States dropping at a record 24% rate in the April-June period.
“The coronacrisis has pushed the world economy into a deep recession,” said Goldman Sachs chief economist Jan Hatzius. “The response to that crisis represents a physical constraint on economic activity that is unprecedented in postwar history.”
The bleak U.S. economic picture ahead of the November presidential election has prompted President Donald Trump to consider how to reopen businesses when a 15-day shutdown ends next week. Given rising infections and death toll, health experts, economists and politicians have cautioned against such a move, which they say could backfire, with Americans remaining fearful of going out.
Mirroring the emptying of supermarket shelves around the world, indebted corporates have rushed into money markets to hoard dollars, with a global shortage of dollar funding threatening to cripple firms from airlines to retailers.
PMI surveys from Japan showed the services sector shrinking at its fastest pace on record this month and factory activity contracting at its quickest in a decade.
This was consistent with a 4% contraction in 2020, Capital Economics senior economist Marcel Theliant said. The postponement of the Tokyo Olympics is expected to deal a heavy blow to the world’s third-largest economy.
With most asset markets tanking, global central banks have been rolling out extraordinary measures on an almost daily basis to stop the rot.
In its latest drastic step, the U.S. Federal Reserve on Monday promised bottomless dollar funding and an array of programs to help keep companies afloat.
For the first time, the Fed will back purchases of corporate bonds, backstop direct loans to companies and “soon” will roll out a program to get credit to small and medium-sized businesses. It will also expand its asset purchases by “as much as needed.”
The Fed last week slashed borrowing costs to zero and took other emergency steps to keep the commercial paper, U.S. Treasury debt and foreign dollar funding markets functional.
But some analysts say infinite monetary policy easing may not be enough and fiscal steps are crucial. There was some optimism on that front, with senior Democrats and Republicans saying on Tuesday they were close to reaching a deal on a $2-trillion stimulus package to aid the U.S. economy.
Financial markets around the world rebounded sharply on Tuesday on hopes for greater stimulus.
Also on Tuesday, G7 finance ministers and central bank governors pledged to expand fiscal and monetary actions for as long as necessary to restore growth and confidence.
With the International Monetary Fund predicting a global recession, the world’s 20 largest economies agreed on Monday to develop an “action plan,” but without specifics.