- The virus outbreak has hit manufacturing activity in both China and the U.S. Manufacturing activity in China touched its lowest since the reading began in 2004.
- Government bond yields have sunk as investors move into safer assets. Meanwhile, the biggest recession indicator — the yield on the U.S. 10-year Treasury note dipping below the yield on the 3-month paper — occurred last month, triggering fears of a recession around the corner.
- Central bankers and economists across the world have warned that the outbreak of the coronavirus could push the global economy into recession this year.
- Visit Business Insider’s homepage for more stories.
The outbreak and spread of coronavirus has economists and investors worrying if the world is heading toward a recession.
What causes a recession? A recession occurs when there is a widespread decline in spending activity.
The new coronavirus — which causes a disease named COVID-19 — has infected more than 89,000 people, killed at least 3,000, and spread to upward of 60 countries. The epidemic has disrupted global supply chains, hammered consumer demand, and forced companies to close stores or reduce opening hours in affected areas.
Here are the signals that show a recession may just be around the corner:
The virus outbreak has hit the Chinese manufacturing industry.
China’s manufacturing-purchasing-managers index fell to 35.7 in February from 50 in January, according to data released by the National Bureau of Statistics on Saturday. It was the lowest reading for the indicator since the survey began in 2004. China’s non-manufacturing gauge also fell to 29.6, its lowest ever.
These numbers, driven by the fast-spreading coronavirus outbreak, show that the severity of the virus is worse than the financial crisis of 2008.
“China’s PMIs were an absolute horror show but no one can really say they are surprised given the situation in the country and the government response. We know that the economic hit in China in Q1 is massive – the question is not how bad it was but how bad will it be in Q2 – how long does this last,” Neil Wilson, chief markets analyst at Markets.com, said in a research note on Monday.
U.S. manufacturing activity fell in February as the outbreak of the deadly coronavirus dampened market sentiment, data from the Institute of Supply Management (ISM) showed on Monday.
The manufacturing index slipped to 50.1, missing economists’ forecasts for a print of 50.5. A reading above 50 indicates expansion in the sector. In January, the gauge rose slightly above that level to 50.9 for the first time since July.
“Coronavirus continues to be front and center as a major supply chain risk to our company. Access to information in China — from our supply base and customers — is slow to come by,” one respondent said in the ISM release.
The inversion of the yield curve is said to be one of the most popular recession indicators.
Last month, the curve inversion between 3-month and 10-year US Treasury bond yields fell to its most negative point since October amid ongoing concerns over the coronavirus outbreak.
“That’s pretty remarkable, as it shows that investors are pretty pessimistic about future US GDP growth and interest rates,” Dev Kantesaria, a portfolio manager and founder of Valley Forge Capital Management, said in an interview with Markets Insider last month.
An inverted yield curve happens when longer-term debt has a lower yield as opposed to shorter-term debt.
This phenomenon is referred to by many economists as a recession indicator. While a recession may not be something that can happen immediately, data shows that recessions have followed inversions a few months to up to two years later over many decades. According to Reuters, the U.S. yield curve has inverted before every recession in the past 50 years, offering a false signal just once in that time.
Global bond yields are hitting record lows across the board on fears of the impact of coronavirus.
Government bonds are generally viewed as safe-haven assets for investors. When there is uncertainty and challenging market conditions, investors tend to rush their investments from riskier assets to safe havens such as gold and government bonds. The rise in demand for government bonds has pushed bond prices higher and yields to record lows.
U.S. Treasuries have enjoyed a spike in investor interest as stocks ended February with their worst week since 2008. The S&P 500 index and Dow Jones Industrial Average both entered correction territory on Thursday as investors saw little hope for stocks avoiding coronavirus risks in the near-term.
Increased bets on a Federal Reserve rate cut are also weighing on U.S. bonds. Fed chief Jerome Powell issued a rare statement on Friday saying the central bank is open to lowering its benchmark interest rate if the outbreak poses a major economic threat.
The novel coronavirus has the world economy in its most “precarious position” since the 2008 financial crisis, the Organization for Economic Cooperation and Development said Monday in its latest forecast.
“The global economy faces its biggest danger since the financial crisis,” the OECD warned. “Containing the epidemic and protecting people is the priority.”
Adding to ongoing concerns about the state of the global economy, the OECD’s chief economist, Laurence Boone, said in a blog post that the organization expected a sharp slowdown in global growth in early 2020. Boone added that OECD projections indicated the level of world growth would fall as low as 1.5% this year, halving the 2020 projection of 3% that the organization made in November.
The OECD also warned that against the backdrop of already weak growth across the globe, certain economies such as Japan and the euro area could slide into recession this year.
Central bankers and economists across the world have also warned against the rising threat of recession from the outbreak of coronavirus.
Last week, former Federal Reserve Chair Janet Yellen warned coronavirus could cause the U.S. economy to shrink. “It’s just conceivable that it could throw the United States into a recession,” Yellen said at a Brookings Institution event in Michigan, according to Bloomberg. A technical recession is defined as two consecutive quarters of GDP declines.
Meanwhile, the CEO of financial services firm deVere Group said last week that the continued threat of coronavirus to consumer spending, supply chains, and trade is bringing the world “to the brink of a global recession” in 2020.
Further, new research from the MIT Sloan School of Management and State Street Associates showed that there’s a 70% chance that a recession will hit in the next six months, CNBC reported last month.
On Monday, UBS said in a research note that a recession remains a risk case, but not their base case.
“In one week, equities and bond yields have moved rapidly to price in a significant probability of a global recession. The nearly 13% decline in the S&P 500 from its all-time high is close to half its average decline during a typical bear market, suggesting investors have priced almost a 50% chance of a global recession this year.”