On Monday, fears were realized that the coronavirus could lead to an economic crisis.
In early heavy trading, major U.S. stock indexes plunged so sharply that a so-called “circuit breaker” was tripped to halt all transactions for 15 minutes.
The self-imposed mechanism has been used only one other time — Oct. 27, 1997 — when stocks dropped by 7.2%.
In just two weeks, the market has dropped by 17%. Monday’s final descent was by 7.2%
Economists say fasten your seatbelts, because more volatility is to be expected. But what is clear is that the past decade of untempered growth has come to an end. Across the world, estimates for growth have been slashed, and it’s clear it will take much longer to climb out of the current global economic paralysis than originally thought.
The coronavirus and falling oil prices are at the root of the mayhem.
The fast-spreading virus virtually halted production in China of the necessary parts to make everything from automobiles to computers to pharmaceuticals. Production activity for February was below that of the 2008 global recession. Auto manufacturing has been the worst hit.
As the world’s largest exporter, China is holding the economies of other countries in limbo as their manufacturers wait for necessary parts.
General Motors has put employees at two U.S. factories on notice of expected layoffs if parts don’t arrive soon. In Korea, Hyundai Motors has had to suspend production at one plant because it couldn’t get parts from China.
After 10 weeks of no imports, manufacturers around the world have depleted their inventories, leaving them little choice but to lay off workers and significantly scale down production.
Though the new virus is beginning to ebb in some parts of China, the number of deaths and new cases attributed to the virus are still growing in Wuhan, its epicenter.
So it’s still far from business as usual in China, with about 52% percent of employees returning to work.
The corona virus is now making its way to other parts of the world and causing the same kind of mayhem — interruptions in travel, consumerism and production — but on a larger scale. What China could absorb, the world cannot. Few countries have the ability — or the will — to restrict the movement of hundreds of millions of people.
Another result is an oversupply of oil in global markets and a recent slash in prices. With demand for oil cooling, OPEC wanted to trim production in an attempt to stabilize prices. But rather than play along, Russia and Saudi Arabia, the kingmakers of oil, launched a bidding war over the weekend to not only increase production but cut its price.
As a result, the value of oil plunged 24%, with oil trading at about $30 a barrel, significantly below the $50-a-barrel break-even price necessary for U.S. oil producers to make a profit. It’s been since the 1991 Gulf War that stocks have fallen to such a degree, shaking the foundations of companies and businesses that service oil and natural gas sectors.
If this goes on too long, layoffs and then bankruptcies can be expected.
