There are rare moments when the global economy seems to be reconfiguring under our feet. These can be extremely rapid explosions, not obvious to people who just go about their business, but blatantly for those who interpret the movements of the financial markets.
March 2020, it is now very clear, is one of those moments.
Already, it has become apparent that parts of the U.S. economy may have to cut operations or shut down altogether in an attempt to slow the spread of a new coronavirus, particularly in travel-related businesses. Over the weekend, Russia and Saudi Arabia launched an oil price war that sent the price of crude oil to its greatest plunge in three decades – which could lead to widespread bankruptcies in the U.S. oil and gas sector. energy.
The exact extent of the economic damage the United States faces is still an open question, and there can still be significant disruption without a large-scale recession. But market activity on Monday indicates that some very bleak possibilities are becoming more likely.
Sunday evening in the United States, Asian markets opened for the week with unlikely moves in some of the most significant measures of the world’s economic and financial conditions. The flashing numbers on merchant screens seemed to indicate a realignment of the global economy.
Ignore the sharp liquidation of stocks – it is an effect, not a cause, of the disruptions that reshape the global economic outlook. What matters now are bond yields and commodity prices, the two most significant indicators of a changing landscape.
These market prices tell us that a recession is increasingly likely in the United States this year and that it will likely leave scars on the economy for years to come. Worse, it seems that the predictions of a V-shaped slowdown with a sharp and sharp rebound are probably out of the blue.
“We have reached the tipping point where things feed on each other,” said Julia Coronado, president of MacroPolicy Perspectives. “We will lose part of our activities and we will get out of it. This is the good news. But are we going out or out? Exploration is more likely. “
Not only did the futures markets indicate that the Fed will further lower its short-term interest rate target in the coming weeks, but the yield on 10-year US Treasuries also fell briefly below 0.4 for percent, and the 30-year bond is now less than 1 percent. These figures strongly suggest that the Fed will have to keep rates close to zero – or possibly below zero at some point – for a very long time.
Routing oil prices – a barrel of West Texas Intermediate crude oil was $ 32.46, down 22% in a single day and about half its level at the start of the year – causing difficulties ahead in the US oil sector.
Cheaper oil will create benefits for American consumers and the oil consuming industries. But as the shale gas industry has grown and the United States has become a net exporter of energy, the balance has changed in how cheaper energy affects the economy.
The pain of cheap oil will tend to be highly concentrated in oil producing sites and will have an inordinate impact on capital spending. (Energy spending is an important driver of demand for heavy industrial equipment.) A revealing indicator: the shares of Halliburton, the leading manufacturer of energy equipment, fell by 35% in the middle of the morning, compared to around 7 % for the whole market.
The United States has experienced something like this before, late 2015 and early 2016, when a drop in commodity prices caused an economic collapse that was most pronounced in the oil sector and in heavy industry.
In this episode, the overall U.S. economy continued to move as consumer spending and the service industries were generally unaffected. What makes the outlook for 2020 seem so different is that the collapse in oil prices comes at the same time as the coronavirus seems likely to block these sectors.
The damage is still very uncertain. But if larger gatherings like conferences and concerts are canceled, and more people decide not to fly this summer and stay at home more generally, it could cripple the consumer side of the economy. .
This means that workers who serve these industries will be threatened with time off, lost hours or layoffs. “This is unusual in that it may prove to be faster than past downturns,” said Jay Shambaugh, director of the Hamilton project at the Brookings Institution. “The decline in oil prices and the decline in financial markets alone, and when you add these to the impact of the virus and to global demand, at some point it spills over into the US economy.”
Companies affected by the coronavirus spending freeze would, like their energy counterparts, be at risk of default.
Years of aggressive lending by companies could bite them again, and a few high-profile bankruptcies could trigger a wider risk reassessment among lenders, which means that even healthy businesses are struggling to renew their loans.
The downside to aggressively borrowing American businesses over the past decade is that it makes businesses more fragile – less able to withstand the occasional hiccups in demand or a supply problem. It seems that 2020 will be a test of their resilience and whether debt has really become excessive.
Indeed, the fall in energy prices caused by geopolitical machinations combines with the coronavirus to put under pressure many large industries so as to be able to rebound on each other – via the financial markets, the economy and vice versa – unpredictably.
The news is not all bad. Falling oil prices are really good news for consumers; lower bond yields will translate into lower mortgage rates; and the big market movements on Monday are likely to attract the attention of policy makers and bring about a more aggressive response.
“If the virus does not spread too widely in the United States, or if a natural spike occurs in the rate of infection, the economic damage could be contained,” said Megan Greene, senior fellow at Harvard Kennedy School . “A massive fiscal stimulus would be huge at this point.”
In other words, avoiding some of the most dismal possibilities could take a certain mix of luck and a strong public policy response.
Other times like this, when the financial markets were showing signs of upheaval, did not always lead to economic disaster. The September 2008 crisis did so, as the global economy has rebounded well since the default on Russian debt in August 1998.
So far, retrospective data suggests that the US economy is holding up well.
But an economic expansion that would reach its eleventh anniversary this summer is in danger of an untimely end. If bond market investors are right, the economy will be haunted by the forces that have been unleashed for a long time.