An Economic Pandemic

The coronavirus now appears to be infecting economies as quickly as it does people.

An oil price war is fueling a broader, global market rout as investors are increasingly panicking over the economic impact of the COVID-19. Meanwhile, yields on long-term U.S. government debt—a port in a storm for nervous investors—fell to all-time lows, a clear indicator of a looming recession that could come more quickly than many experts feared.

Oil prices plunged about 25 percent in New York and London, dragging down stock markets in Europe and Asia. In New York, stocks fell 1,800 points within minutes of the opening bell before trading was briefly suspended, and traded well down the rest of the day, with the Dow Jones Industrial Average finishing down 2013.76 points or nearly 8 percent, the worst single-day drop since the financial crisis of 2008.

“This virus is as economically contagious as it is medically contagious,” said Richard Baldwin, a professor of international economics at the Graduate Institute in Geneva. It amounts to a triple whammy for the manufacturing sector in most major economies: outright closures in many Asian plants, supply chain disruptions all over, and topped off with a plunge in demand for cars, electronics, and many other manufactured goods as people take a wait-and-see attitude to the crisis.

“This one is economically big, because it is now hitting the big economies,” Baldwin said. “The size of the economic shock is a different order of magnitude than any pandemic we have seen.”

The fear now gripping financial markets reflects a recognition of this growing economic impact. The coronavirus, which had already disrupted factories and trade in China and across East Asia, is now wreaking havoc in Europe. Japan’s economy shrank last quarter even more than initially thought, and Tokyo is toying with another huge fiscal stimulus to goose the economy back to life. Germany, too, is mulling a multibillion-euro economic injection to offset the worst of the crisis, while France is staring at now-stagnant growth. Italy has essentially shut down the industrial northern part of the country as cases and fatalities continue to mount, all but guaranteeing another recession. (Scratch that: Italy announced late Monday a lockdown on movement in the entire country.)

While U.S. President Donald Trump initially dismissed concern over the virus and its impacts as “fake news,” some economists are predicting that the aftershocks could send the world’s biggest economy into a recession this year. With Trump facing re-election in November, the president, Vice President Mike Pence and their advisers held a news conference after markets closed Monday to lay out further efforts to contain the virus domestically and to ease the economic pain of Americans who might be affected, including a payroll tax cut. The president said he would announce “major” measures on Tuesday after consulting with Congress.

“This blindsided the world and I think we handled it very, very well,” Trump said.

China, where the virus first broke out, seems to have passed the peak of its crisis, and economic activity is slowly returning. The concern is that other major economies, especially the United States, will see a big spike in the number of virus cases with the corresponding impacts on trade, travel, and manufacturing.

The economic fallout of the virus is making clear just how interdependent the global economy really is, despite years of efforts by Trump to partially undo globalization by forcing companies to move supply chains out of China and restricting trade in certain critical sectors. What’s not yet clear is whether the ultimate fallout of the virus will be to accelerate the breakdown of globalization, sending firms scurrying to bring manufacturing back home so as to avoid these kinds of disruptions, or just the opposite.

“In the longer run, it could encourage more populism and undo these value chains,” Baldwin said. “Or it might be that we finally understand that if somebody gets sick in China, it’s a problem for all the G-7 countries” and end up boosting multilateral cooperation and coordination, he said.

Monday’s bloodbath on global markets was a timely reminder of how the real-world economic impacts of the virus, the oil market, geopolitics, and the global market panic are all closely linked.

Because of the physical disruption to global economic activity, forecasters expect global oil consumption to decline this year, for the first time since the financial crisis a decade ago. On Monday, the International Energy Agency said it expects global oil demand to fall by almost 100,000 barrels a day—compared with expected growth of more than 800,000 barrels before the outbreak. That collapse in demand comes amid a massive oversupply of oil. “The situation we are witnessing today seems to have no equal in oil market history,” International Energy Agency Executive Director Fatih Birol said.

Last week, big oil producers, led by Saudi Arabia, thought they had found a way to limit the fallout from that declining demand by cutting oil production, which would have helped prop up prices. But Russia declined to go along with the production cuts, preferring to inflict pain on the still-growing U.S. oil industry instead. Once that Saudi-Russian agreement broke down on Friday, all bets were off: Over the weekend, Saudi Arabia dramatically cut the sales price of its own oil exports, sending the price of oil down as much as 30 percent in overnight trading, which in turn scared the pants off markets in Asia, Europe, and finally the United States, which in turn sent investors fleeing toward safe debt like U.S. Treasury bonds.

Russia’s refusal to go along with the cuts makes some sense from Moscow’s point of view. Russia has squirrelled away about $150 billion in a rainy-day fund, and officials on Monday said that would enable the country to weather as much as six years of oil prices below the $42 a barrel or so that Moscow needs to balance its budget. And by ensuring that oil prices fall, Russia could take a swipe at the U.S. oil patch, which is uniquely vulnerable this year after spending years running up debt and which is running out of ways to improve productivity, leaving it more exposed to falling prices.

More to the point, from Russia’s perch: The U.S. shale energy boom is what has enabled recent U.S. administrations to wage more aggressive financial warfare through sanctions, including against Russia and regimes it supports, such as Venezuela. Sanctions on Venezuelan or Iranian oil would in the past have led to higher global oil prices, but rising U.S. production kept that threat at bay—tempting first the Obama administration and now the Trump administration to use sanctions much more often. Ditto for the shale gas boom, which has turned the United States into an exporter of natural gas and a potential alternative to Russian supplies in Europe. The shale gale makes it that much easier for Washington to threaten sanctions on Russia’s big Nord Stream 2 pipeline to Germany, for instance.

Understanding Saudi Arabia’s plan to slash prices and ramp up production is a little trickier. Like Russia, it bristled at competition from U.S. oil producers and wasn’t happy that its rivals would benefit from higher oil prices bought with its own sacrifices. But prices were already sliding after OPEC failed to reach an agreement last week; it’s not clear that starting an all-out price war will make Russia regret its decision to ditch Saudi cooperation last week at the OPEC meeting and sign on to a fresh pact to curb output.

“If the goal is to shock Russia with weak oil prices in order to drag Moscow back to the table, we think it will fail,” noted Amrita Sen, the chief oil analyst at Energy Aspects, a consultancy, in a note. “This new Saudi approach will only harden Russia’s position.”

The move is another risky gambit from Saudi Arabia’s de facto leader, Crown Prince Mohammed bin Salman. Saudi Arabia needs crude prices closer to $80 a barrel to balance its budget. It’s also got fewer currency reserves and more public spending than it did in 2014, the last time OPEC crashed oil prices to drive out U.S. rivals.

“Saudi Arabia can afford to wait out low oil prices. But, there is little to suggest that Riyadh is in a better position now than in 2014 to absorb sustained low prices,” said Torbjorn Soltvedt, the principal Middle East and North Africa analyst at Verisk Maplecroft, a risk consultancy.

And lower oil prices will also mean more economic pain for other big producers, from Iraq to Mexico to Brazil.

But the immediate pain was felt in the U.S. oil patch, where shares in many energy companies fell by nearly half on Monday, outstripping even the wider carnage in the rest of the market. With oil prices headed lower, some producers wasted no time in announcing cuts to drilling and production plans. Most analysts expect a wave of bankruptcies and restructuring to tear through the U.S. shale sector if low oil prices persist—which could end up being an economic black eye for Trump in traditionally red states in an election year.

This article was updated Mar. 9, 2020 to reflect the broadening of the Italian lockdown and the announcement from the White House.