The ongoing spread of the coronavirus will likely translate into the weakest global economic growth since the financial crisis more than a decade ago.
In its “best case” scenario, the OECD said that GDP could rise by 2.4 percent this year, down from a prior estimate of 2.9 percent. But because the situation is highly uncertain, the risk is on the downside. An economic contraction in the first quarter is possible.
In China, economic activity has plunged. The Chinese government’s PMI data read 35.7 in February, an all-time low, which reflects a steep fall-off in manufacturing activity. That was down from a reading of 50 in January. The non-manufacturing index fell to 29.6, evidence that services activity also came to a standstill. Anything below 50 signals a contraction.
For now, the slowdown in the U.S. is expected to be modest. The OECD cut growth estimates to 1.9 percent, down from 2.0 percent previously. But the spread of the coronavirus continues, and the worst of the economic impact likely still lies ahead.
“We are super-humble doing this projection, given how uncertain things are,” Laurence Boone, the OECD’s chief economist said.
On Monday, Bank of America Merrill Lynch cut its 2020 oil price forecast for Brent by a whopping $8 per barrel, lowering its 2020 WTI average to $49 and Brent to $54. The widely-attended IHS CERAWeek Conference in Houston was canceled because of the coronavirus, a gathering that saw more than 5,300 people last year.
According to Goldman Sachs, the world is now experiencing the largest commodity demand shock since the financial crisis a decade ago. China’s oil demand has fallen by 4 million barrels per day (mb/d) for the time being. That compares to the 5 mb/d demand shock seen during the 2008-2009 meltdown, according to Goldman’s Jeff Currie. He added in his Feb. 28 report that China’s oil storage is filling up, which could add further selling pressure on oil.
After a massive 14 percent loss last week for crude oil, prices rose in early trading on Monday. “Besides a general brightening of sentiment on the markets on the back of hopes of rate cuts by central banks and economic stimulus measures on the part of governments, the expectations of deeper OPEC+ production cuts are lending buoyancy to prices this morning,” Commerzbank wrote in a note.
Central banks around the world have started to issue statements about cutting interest rates. Federal Reserve Chairman Jerome Powell issued a statement on Friday, noting that while the “fundamentals of the U.S. economy remain strong,” the central bank will “use our tools and act as appropriate to support the economy.” Powell noted that the coronavirus “poses evolving risks to economic activity.” The Bank of Japan also promised to step in if needed.
While terse, markets interpreted the statement as a pledge to cut interest rates if the economy deteriorates. In fact, the Federal Open Market Committee meets on March 17 and 18, and traders are increasingly assuming a rate cut. Goldman economists predict that the Fed cuts rates by 75 basis points over the first half of 2020. Related: Putin Hints Russia May Participate In Newest Round Of OPEC Cuts
“The statement buys some time with the caveat that they follow through with a rate cut,” Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington, told Bloomberg. “The question is, will it buy them enough time to reach mid-March? That is less clear.”
As of Monday, the presumed action from the central bank – along with rising odds of additional OPEC+ cuts – helped stop the selloff, at least temporarily. “The surge in oil prices today is driven by hopes that the OPEC alliance will deepen output cuts,” Michael Poulsen, an analyst at Global Risk Management, wrote in a report. “Hopes in the financial markets are now that the world’s central banks could spur some relief in the economies with economic stimulus.”
Ultimately, though, interest rate cuts don’t do very much to stop the spread of the virus. The haphazard response from the U.S. federal government likely means that this story is far from over.
By Nick Cunningham of Oilprice.com
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