The spread of coronavirus means that – for now – things will only get worse for the global economy

Markets are resilient to shocks, so growth will return – but not yet, writes Hamish McRae

Army personnel spray disinfectant to prevent the spread of the coronavirus in front of a branch of the Shincheonji Church of Jesus in Daegu, South Korea (Newsis/AP)

Wall Street is saying there will be a recession. That is the tough conclusion we should draw from the plunge last week. The Dow Jones index opened the week above 29,000, some 500 points off its all-time high of 29,551 on 12 February. By Friday’s close it was down to 25,409, having dipped below 25,000 in the day’s trading. This is huge; the biggest fall since the 2008 financial crisis.

Here in Washington, the speculation is that a recession, albeit one triggered by an external event such as the coronavirus, will scupper Donald Trump’s campaign for re-election. But while this may be a comforting thought for the Democrats, it is not at all comforting for the rest of us. The world’s second-largest economy, China, has clearly stalled and the impact of that is spreading across the globe. If the world’s largest, the US, goes into recession, so will much of the rest of the world.

It is not helpful to add to the speculation as to how grave the epidemic might be, so let’s assume that Wall Street is right and that there will be a sharp downturn. What then?

Well, we are not flying completely blind because we have a lot of experience of the way the world economy responds to shocks. We know there is an economic cycle, with periodic recessions punctuating longer expansions, and so we were due for a dip anyway. And we know that national governments can co-ordinate a response that will buttress their economies from the worst effects of the shock. So here is a sketch – it cannot be more than that – of what might happen.

Industries that rely on large numbers of people getting together will have a dreadful few months. Travel and tourism, which in 2018 was more than 10 per cent of global activity, will be gravely savaged. This will have a knock-on impact on energy demand, so energy companies will suffer.

More generally, service industries, unlike manufacturing, cannot make up their output by increasing production later, and many businesses will need help to survive. The plight of small and medium-size enterprises will be severe as in general they will not have the resources to survive a sudden downturn in demand. This is bad news for the restaurant and hotel trade, and bad news for sports and entertainment industries. We have already seen major sports fixtures postponed, and Tokyo Olympics are in the balance.

On the other hand, basic industries such as agriculture and food distribution, will be less damaged, because people need to eat. Indeed Chinese experience suggests that some forms of distribution – takeaway meals and food delivery services – will boom, as people shun the shops.

At a macro-economic level, countries that rely on exports will suffer more than those that are primarily domestic economies. So the US, where exports account for 12 per cent of GDP, will pull through better than Germany, where they are 47 per cent of GDP. The UK is in the middle with exports of about 30 per cent of GDP.

Timing. The first half of this year will show some ugly figures. Countries where growth is already weak, notably Italy and probably Germany, will inevitably slip into recession under the official measure of two consecutive quarters of negative growth. For the US and UK, one quarter of negative growth is extremely likely, and two possible. So yes, it is quite possible that there will be a US recession this summer.

The questions then will be about the timing, nature and strength of the recovery. It is a bit unscientific but the common sense outlook is that the faster things go down the faster they will come back up. This would imply a V-shaped recession. A lot depends on whether the virus is in clear retreat by the late spring/early summer. If it is, the upward swing of the V should be in the autumn. If not, I am afraid the recession will look more like a U, with a longer flat bit at the bottom, or even a W, with a modest recovery then another downward lurch.

Policy will help. Governments can certainly boost things at an overall level by fiscal policy, and can help businesses (and people) through the downturn by making credit more easily available. But we know how difficult it is to get the detail right, and we should expect governments to make mistakes. It has been known to happen before.

The most comforting thing to say, though not comforting sadly for people affected by the virus, is that economies are resilient to shocks. Eventually, growth does return, though right now things will get worse before they get better.