MIER Policy Brief 2

The Covid Crisis: Markets In Turmoil and Fractured Trade Flows

The Covid Crisis: Markets In Turmoil and Fractured Trade Flows

The global economy has never faced an outbreak in recent times such as the Covid-19 and this will lead to repercussions on the economy of an unprecedented scale. In all likelihood the impact on the global economy will be worse than that faced during the 2008 crisis.

Most growth forecasts have been pessimistic. Fitch has put global growth for 2020 at negative 1.3 percent (Fig. 1). OECD in its interim economic assessment (as of 2 March 2020) forecasts annual global GDP growth to be 2.4 percent, but expects growth to go down to 1.5 percent if the outbreak intensifies. More recently, Goldman Sachs has revised its global growth estimates downwards to -2 percent. IMF’s Chief Economist, Gita Gopinath, has projected a negative 3% global growth for 2020. Technically, the IMF defines a recession as an annual growth rate below 2.5 percent, indicating that it is not so much a matter as to whether there will be a recession or not, but how deep and long it would be.

Figure 1

It is not surprising that a global recession should emerge given the multiplicity of factors at work. The crisis is unprecedented in so far as it has provoked a deglobalisation response, in so far as countries have closed their borders to foreigners, shipments have halted, the aviation industry has come to a standstill, and the movement of raw materials, intermediate goods, and labour is severely restricted. Another feature of the Covid crisis is the simultaneous disruption of production and a constrained demand due to wage shrinkage. The world’s leading engines of growth have been affected, in particular, the US, China, EU and Japan.

These countries can be seen as nodes of growth which generate trade flows and global demand for goods and services, affecting the economies that they are linked to. This can be expected to reduce the flow of goods across nations as well as the demand for inputs. The lower demands for goods has had an effect on commodity prices and the decline in the price of oil (Fig. 2) to an 18-year low is symptomatic of this.

Figure 2

Further, there will be a sharp decrease in government spending across countries as they divert expenditure to health care, measures to contain the outbreak and on fiscal packages to counteract the effects of the disease. Consumption expenditure will go down due to the sharp downturn in household income.

These influences do not produce a vibrant economic environment, compounded by the nature of Covid-19 which is not a well-studied virus and for which a vaccination is yet to be developed. The kind of trajectory that the spread of the disease will take is unclear as is the appropriateness of containment strategies. The global economy is, understandably, in a state of uncertainty that is captured by fluctuations in the manufacturing and services indices. This is underscored by a high volatility index (Fig. 3). The outbreak has dampened consumer sentiments and weak business confidence.

 Figure 3

The pandemic is likely a long-drawn affair involving the twin challenges of minimising the spread of the disease as well as the macroeconomic impacts. The degree of uncertainty is high for several reasons and these include an uncertain treatment protocol, the possibility of a second wave of infection looms large, the lack of masks and ventilators and an over-burdened healthcare system. Market anxieties over these concerns have caused a tremendous dip in stock markets.


The US bond market has reflected these worries (Fig. 5). It is significant that the entire US bond yield curve had fallen below 1 percent in March. By 22 March 2020, the 10-year Treasury note recorded an inverted yield due to fears of an impending recession. Late in March, the 10-year Treasury note yield was 0.73 percent as against the 30-year bond yield which was 1.35 percent. The attractiveness of US government bonds is a function of several factors. One, the 10-year notes are seen as a safe haven that other classes of investment are not able to offer. Second, there is high demand from East Asia, particularly Korea and Japan. The earlier is not necessarily positive because it means real investments are deprived of funds. If the rate of inflation were to be factored into the yields, then it is possible that the real yields are negative, a point that indicates how strongly security is favoured over return. Financial markets in developed countries are in a state of flux and could progress to turmoil should the spread of the virus attack not be swiftly contained.

 Figure 5

There are widespread expectations global trade could seriously suffer from the current scenario. The WTO has developed a model for different scenarios assuming that the global economy could be affected through three channels. The model assumes a. reduced labour supply, b. reduced demand scenario is an optimistic one, where there is V-shaped recovery. The second is less optimistic and it presumes U-shaped or a less swift recovery. Finally, the third scenario posits a pessimistic L-shaped recovery.

The WTO study forecasts that ASEAN is likely to demonstrate a -9.3 percent change in real exports for 2020 relative to the benchmark without the pandemic (Table 1). Assuming a less pessimistic scenario, there would be an 18.2 percent contraction in real exports; and a drastic -22.1 change against the benchmark should recovery be L-shaped. The superpowers, specifically, China, EU-28, Japan and the US are likely to have a decrease of about 9 percent at best and a change that is close to -21 percent in a pessimistic scenario. The global changes are equally pessimistic.

 Table 1

The outlook for global exports at the sectoral level is equally dismal. Aside from the pharmaceutical industry, all other exports are expected to decline (Table 2). Of relevance to Malaysia are fossil fuels and petroleum products, both of which will contract by 5.5 percent and 7.7 percent, respectively. It is forecast that computer and electronic products will decline in the optimistic (-10.5 percent) and pessimistic (-22.6 percent) cases. Global exports from the manufacturing sector such as electrical equipment and machinery do not have an encouraging outlook either.

 Table 2

The global economy is plagued with a confluence of negative factors, ranging from uncertainty in dealing with the pandemic, to depressed consumer and business confidence and including turmoil in global financial markets besides fractured trade flows. Several cautionary policy suggestions arise out of these issues.

First, the government will have to target the export-oriented manufacturing sector in the aftermath of the MCO.Those industries that contribute to Malaysia’s exports in products from the electrical and electronics, petroleum and petroleum-based chemical and machinery and equipment sub-sectors should receive targeted support.

Dr. Shankaran Nambiar,
Head of Research at MIER, explains that, “The Covid-19 pandemic has roiled global financial markets and this has serious consequences for Malaysian trade and investment. Even as we are working out strategies to contain the incidence of the disease in Malaysia we have to plan for the recovery of the economy which will be damaged as has not been experienced so far. We will also have to think how we will adapt to the post-Covid global realignment that might see the rise of stronger nationalistic tendencies and a shying away from free trade policies.”

The MIER Policy Brief series is produced by the Malaysian Institute of Economic Research, Kuala Lumpur to stimulate thinking on current issues.

MPB Series Editor: Tan Sri Dr Kamal Salih

MPB Series Coordinator: Dr Shankaran Nambiar

The views expressed in this publication are those of the author and do not necessarily reflect the policy or position of MIER or any organization with which the author is affiliated

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