- The coronavirus has already created a deep global recession.
- In the best-case scenario, the virus may last one quarter. In the worst-case scenario, the virus will spread havoc for a year.
- Conventional recessions can be tackled by loose fiscal and monetary policy. These will not work when fear drives the slowdown.
- Governments the world over will let fiscal deficits explode to stimulate spending.
As expected the U.S., U.K. and eurozone economies have all fallen off that coronavirus cliff into significant recession, writes Tim Worstall for Seeking Alpha.
An expected fall in Economy
After the experience of China earlier in the year, the North Atlantic economies were expected to fall off the cliff as the coronavirus arrived. It might be that the actions governments are taking about it make it worse, might be that some of the amelioration makes it better.
The economy stutters at 5 pm every evening, shudders at the weekend and near entirely halts at the winter holidays. But of course it rapidly starts up again each time. What matters to us here is how quickly is the recovery going to come.
A 6 month close down would lead to two things, both the loss of a lot of production and also the permanent loss of a lot of productive capacity. That weekend slowdown leads to very little of either.
The ray of sunshine here is that a pandemic caused recession before now, the Asian ‘Flu in 1957 and following. The pain was intense, a 10% fall in GDP. It also lasted a fraction of a year.
US PMI
- Flash U.S. Composite Output Index at 40.5 (49.6 in February). New series low.
- Flash U.S. Services Business Activity Index at 39.1 (49.4 in February).New series low.
- Flash U.S. Manufacturing PMI at 49.2 (50.7 in February). 127-month low.
- Flash U.S. Manufacturing Output Index at 47.6 (50.7 in February). 127-month low
A significant fall in GDP is expected real soon now.
UK PMI
- Flash UK Composite Output Index Mar: 37.1, survey-record low (Feb final: 53.0).
- Flash UK Services Business Activity Index Mar: 35.7, survey-record low (Feb final: 53.2).
- Flash UK Manufacturing Output Index Mar: 44.3, 92-month low (Feb final: 52.2).
- Flash UK Manufacturing PMI Mar: 48.0, 3-month low (Feb final: 51.7).
The same pattern there, services get it in the neck, manufacturing not so bad, but the overall economy being largely dependent upon services.
Eurozone coronavirus effects
- Flash Eurozone PMI Composite Output Index(1) at 31.4 (51.6 in February). Record low (since July 1998).
- Flash Eurozone Services PMI Activity Index(2) at 28.4 (52.6 in February). Record low (since July 1998).
- Flash Eurozone Manufacturing PMI Output Index(4) at 39.5 (48.7 in February). 131-month low.
- Flash Eurozone Manufacturing PMI (3) at 44.8 (49.2 in February). 92-month low.
An horrendous drop off in economic activity is expected as a result of the coronavirus.
Asian ‘Flu in 1957
A pandemic influenza has occured in the past whose effects seemed similar. The fatality rate was lower but the compact nature of the effect upon the death rate seems similar.
As Alex Tabarrok points out, “In the last quarter of 1957 the growth rate (on an annualized basis) was -4% and in the first quarter of 1958, -10%, the largest such decline in post WWII history, bigger even than in the financial crisis. By the third and fourth quarters of 1958, however, the growth rate had surged back up to nearly 10% and for the year as a whole GDP declined by less than 1%–a bad recession, 3rd worst by depth in post WWII history, but not unprecedented.”
The Investor View
What this means for us as investors is that the current gloom is overdone. It is crucial to stock up for that coming recovery when stocks are going to rapidly become more expensive than they are now.
But, of course there is uncertainty! That means that the price of risk has risen and those darling stocks that we though would take the fancy of all are going to have a hard time of it. This is the time to be buying into solid dividend paying stocks at the current near unbeatable prices.
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Source: Seeking Alpha
