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Economists see growing recession risk as coronavirus spreads in US and elsewhere

Don Lee, Los Angeles Times on

Published in News & Features

WASHINGTON -- As the coronavirus outbreak enters a potentially dangerous new phase, with cases widening in Europe and expected to spread in the United States, economists have begun to raise their estimates for the risk of a global recession and fallout to the American economy.

Economists say the stock market selloff in recent days reflects a reassessment of the likely magnitude of the hit to corporate earnings in the virus's wake, suggesting the economic pain could last longer and the recovery may not be as swift as initially thought.

"Businesses of all kinds, in a lot of places, being impaired really (made) me skeptical that this is something that would fade quickly and from which we would recover quickly," said Carl Tannenbaum, chief economist at Northern Trust in Chicago. "And that realization is now cascading through both to investors and to policymakers that this is a situation that is more serious than initially thought."

Many American companies rely on overseas sales and production in China for a significant share of their revenue and profits. And a growing number of firms, including Apple, Starbucks and the chipmaker Qualcomm, have lowered their earnings guidance in recent days.

Tannenbaum now sees the Federal Reserve cutting interest rates by a quarter of a point in April. Just a few weeks ago, most analysts expected the central bank would stand pat on rates for the rest of the year.

Fed officials aren't sounding the alarm bells yet, but say they're closely monitoring the situation. And while they don't want to react to volatile swings in financial markets, deepening losses in stocks could undercut consumer confidence, which in turn could cause a retrenchment in spending and push the economy into recession.

 

"The equity market is central to the U.S. economy," said Mark Zandi, chief economist at Moody's Analytics, noting that the large baby boom population is particularly susceptible to a market downturn because they have much of their nest egg in it.

Zandi considered the rapid spread of the virus in Italy as a major turning point, and after Tuesday's warning from the U.S. Centers for Disease Control and Prevention that infections were bound to increase in the United States, he raised the odds of a global recession to 50%, up from just 20% last week.

"If it goes to a pandemic, then I think the economy is in recession," he said.

The World Health Organization hasn't yet classified the outbreak as a pandemic. As of early Wednesday, its daily tracking reported more than 81,000 confirmed cases in more than three dozen countries, with 2,700 deaths, the vast majority in China. The rate of increase in cases is now fastest outside of China.

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