Virus outbreak brings double-dip risk to the fore

By Philip Lawlor, managing director, head of global markets research, FTSE Russell

Assessing how damaging the coronavirus epidemic will ultimately be for the global economy remains challenging.

The viral outbreak has cast a shadow over global growth expectations, which had been improving in recent months thanks to coordinated central-bank stimulus efforts and the US-China trade truce. Notably, leading indicators, particularly in manufacturing, had begun showing tentative signs of recovery.

This fledgling rebound has been mirrored in consensus 12-month forward GDP estimates, which had also appeared to be stabilizing after the sharp deterioration from early 2018 peaks. 

Yield curves resume flattening

Bond markets have largely interpreted the outbreak as a disinflationary shock: With the sharp decline in China-dependent oil and copper prices, breakeven inflation expectations have given back much of their Q4 gains, resuming the downtrend since early 2018. They remain well below stated policy targets, posing challenges for central banks.

Yield curves have also resumed flattening across most of the G7 countries, erasing much of the steepening seen in the final quarter of 2019. Yield curves are not far from the inversion tipping points that had ignited the recession fears and roiled global markets last summer.

What lies ahead for financial markets hinges on the extent of the disruptions to global supply chains, as well as the magnitude and effectiveness of the policy responses in China and elsewhere. 

What is apparent, however, is that the virus outbreak has caught the global economy at a vulnerable point and is disrupting the prevailing mid-cycle recovery narrative and raising the prospect of a double-dip slowdown.

This article first appeared on Feb. 29 on the FTSE Russell blog

Photo Credit: Studio Incendo via Flickr Creative Commons

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