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Are We on the Brink of a Global Recession?

Last week $7 trillion was wiped off global stock markets, the biggest fall since the 2008 global financial crisis. This followed the news that the coronavirus had spread to six more countries across four continents. This means that 50countries now have the disease. The first death from the disease in the United States has occurred and the administration has been accused of being unprepared for the threat to the United States.

The WHO said it was raising its assessment of the global risk to ‘very high’ from ‘high’, which its head of emergencies Dr Mike Ryan said was intended to put national authorities on full alert.

I think this is a reality check for every government on the planet - wake up, get ready, this virus may be on its way and you need to be ready,” Ryan said.

The latest WHO figures indicate over 82,000 people have been infected, with over 2,700 deaths in China and 57 deaths in 46 other countries.

Economists are now more pessimistic about the prospects of a global recession. There was shocking news on Friday when the Chinese Purchasing Managers Index (PMI) fell to 35 (a score of 50 means there is no growth in manufacturing or service production) 35 indicates a massive fall in production. As a consequence, demand for raw materials and agricultural products globally, is likely to take a massive hit.

The United States is less likely to be affected. It is not dependent on trade links with China and the impact is most likely to be felt in supply chains for companies like Apple who has been shifting production to Taiwan. However the US Federal Reserve has indicated that it is prepared to cut interest rates if this is warranted.

Europe and Japan are the economic blocs that are most likely to be damaged by a virus pandemic. They both have generated only 1% growth over the past year and are very susceptible to falling into recession.

“We could see a significant impact on Europe, which has been weak to start with, and it’s just conceivable that it could throw the United States into a recession,” former Federal Reserve Chair Janet Yellen said on Wednesday at an event in Michigan.

In Australia the sectors that are most impacted are education and tourism. Chris Richardson of Deloitte Access Economics has predicted that the impact on Australia will be short and sharp with China getting the virus under control in the near future. He estimates that the cost to the budget will be about $2 billion, which when the $2 billion for bushfire recovery is taken into account means that the MYEFO forecast surplus will shrink to $1 billion. There are some grounds for thinking that the forecast was conservative and the surplus might come in higher than that.

The Prime Minister, Scott Morrison, has indicated that the Government will provide stimulus for the economy, if this is required. However, he has said that any stimulus will be modest, targeted and scalable.

There are a number of consequences for the Australian economy of the current situation. There is a prospect of two quarters of negative economic growth and a fall per capita national income which indicates a fall in the standard of living. This has the prospect of creating fear and panic in the community with calls for instant economic solutions that can be very dangerous.

Last week $7 trillion was wiped off global stock markets, the biggest fall since the 2008 global financial crisis. This followed the news that the coronavirus had spread to six more countries across four continents. This means that 50 countries now have the disease. The first death from the disease in the United States has occurred and the administration has been accused of being unprepared for the threat to the United States.

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