(Singapore, March 5, 2020) Schroder Investment Management, a global investment consultant, is downgrading its global growth forecast for this year to the weakest since 2009, the height of the global financial crisis.
According to a report by its Chief Economist, Keith Wade, the coronavirus is casting a dark shadow over the world economy by threatening to derail the revival in growth which began in the latter part of 2019.
And the confidence in the sustainability of the upswing has been undermined by the spread of the virus which is now threatening the Asia and Europe markets.
In response, the company’s think tank is downgrading its global growth forecast for 2020 from 2.6% to 2.3%.
It says the impact is concentrated in the first half of the year as the fall in demand and disruption to supply chains takes its toll on activity. Italy and Japan are likely to be in recession whilst output in the US is expected to have stalled in the first quarter.
Meanwhile, the US Federal Reserve (Fed) has followed the Reserve Bank of Australia (RBA) by cutting federal funds rates by 50 basis points, down from 1.75% to 1.25%.
The federal funds rate, by which the law requires banks to keep their customer’s money on reserve without interest from it, is used to control the supply of available funds and hence, inflation and other interest rates.
Raising the rate makes it more expensive to borrow because that lowers the supply of available money, which increases the short-term interest rates and helps keep inflation in check. Lowering the rate has the opposite effect, bringing short-term interest rates down.
The current rate cut comes after central banks pledged to take decisive action to tackle the economic fallout from the spread of the virus. Finance ministers from the G7 group of economies also recently met to discuss possible action.
“It seems that either the Fed knows something that no one else knows, or it is panicking,” said Wade.
He said business surveys do point to slower activity. However, there has not been a collapse in US activity. Meanwhile, the number of cases remains low. Certainly, things can get worse and we expect activity to be flat in the first quarter, but we had expected greater confirmation of this before the Fed acted. By making a move now the Fed is signalling that it will support the economy come what may.
Thereafter, assuming the virus is brought under control, activity is expected to gradually improve in the second quarter and rebound more vigorously as firms start to catch up with the backlog of orders. The bounce-back will be supported by easier policy as central banks cut rates and deploy additional fiscal policy.
The report says the Reserve Bank of Australia is likely to deliver one more cut this year, as more monetary stimulus is expected globally. Besides, the European Central Bank is also expected to cut from -0.5% to -0.8% by the end of 2020.
