The coronavirus Covid-19 presents the global economy with its greatest danger since the financial crisis, according to the OECD’s latest Interim Economic Outlook.

Meanwhile, Oil traders and other financial investors are anticipating a severe slowdown or recession in the global economy as efforts to contain the coronavirus fail and restrictions on business activity and transportation proliferate.

Covid-19 is spreading from China to other regions causing human suffering and economic disruption. It is raising health concerns and the risk of wider restrictions on the movement of people, goods and services, falls in business and consumer confidence and slowing production.

The Interim Outlook presents both a best-case scenario in which the extent of the coronavirus is broadly contained and a “domino” prospect of contagion that is more widespread.

In both cases, the OECD calls on governments to act immediately to limit the spread of the coronavirus, protect people and businesses from its effects and shore up demand in the economy.

Even in the best-case scenario of limited outbreaks in countries outside China, a sharp slowdown in world growth is expected in the first half of 2020 as supply chains and commodities are hit, tourism drops and confidence falters. Global economic growth is seen falling to 2.4per cent for the whole year, compared to an already weak 2.9 % in 2019. It is then expected to rise to a modest 3.3 per cent in 2021.

Growth prospects for China have been revised down sharply to below five per cent this year after 6.1per cent in 2019.

But broader contagion across the wider Asia-Pacific region and advanced economies – as has happened in China – could cut global growth to as low as 1.5% this year, halving the OECD’s previous 2020 projection from last November. Containment measures and loss of confidence would hit production and spending and drive some countries into recession, including Japan and the euro area.

Presenting the Interim Outlook in Paris today, OECD Chief Economist Laurence Boone said: “The virus risks giving a further blow to a global economy that was already weakened by trade and political tensions. Governments need to act immediately to contain the epidemic, support the health care system, protect people, shore up demand and provide a financial lifeline to households and businesses that are most affected.”

The Outlook says that flexible working should be used to preserve jobs. Governments should implement temporary tax and budgetary measures to cushion the impact in sectors most affected by the downturn such as travel and tourism, and the automobile and electronic industries.

In the most affected countries, adequate liquidity needs to be provided to allow banks to help companies with cash-flow problems while containment measures are in force, it adds.

If the epidemic spreads widely, the G20 economies should lead an internationally co-ordinated framework for health care support, combined with co-ordinated fiscal and monetary stimulus to rebuild confidence, the Outlook adds.

Records show that United States Treasury notes maturing ten years from now are yielding less than 1.20 per cent, a record low in a time series stretching back to the 1950s, as risk aversion intensifies and investors anticipate interest rate cuts.

Treasury inflation-protected securities (TIPS) with a similar maturity are yielding -0.30%, guaranteeing losses after inflation if they are held to maturity, but at least limiting the scale of the losses, unlike riskier financial instruments.

TIPS yields have fallen more than 50 basis points since November and are at their lowest level since May 2013, when they were still artificially repressed by the Federal Reserve’s quantitative easing programme.

In recent days, U.S. interest rate traders have priced in a 25 basis point cut in the federal funds target rate by the end of April, according to fed funds futures prices, as the central bank responds to deteriorating economic conditions.

U.S. equity valuations have fallen sharply and their positive deviation from the long-term trend has been reduced by around half over the last week.

The U.S. S&P 500 equity index closed on Feb. 27 around 18 per cent above its long-term trend, down from 34 per cent above its long-term trend on Feb. 19.

And front-month Brent futures prices are down almost 24per cent compared with the same time a year ago, the sharpest year-on-year decline since September 2019 and before that May 2016.

The fall in Brent is consistent with a severe slowdown in global manufacturing activity (such as mid-2019 or in 2015/16) or an outright recession.

At the start of the year, most investors and oil traders were anticipating acceleration in global economic growth and oil consumption in 2020 after below-trend growth in 2019.

The trade truce between the United States and China, three rounds of U.S. interest rate cuts in late 2019, and a shift to more monetary and fiscal stimulus around the world were all expected to lead to a cyclical upturn.

In the final three months of 2019, hedge funds and other money managers had purchased the equivalent of more than 500 million barrels of futures and options betting on an increase in oil prices.

By the end of 2019, hedge fund positioning in petroleum was the most bullish for more than 15 months as portfolio managers anticipated faster oil consumption growth in 2020.

But the proliferation of business and transportation shutdowns as governments and firms respond to the coronavirus outbreak has forced an abrupt reassessment of the outlook.

Fund managers have sold more than 450 million barrels of petroleum futures and options since the start of the year as the prospects for oil consumption have deteriorated.

The interplay between coronavirus and a global economy already weakened by the trade war in 2018/19 is threatening to push the economy towards a double-dip slowdown or even a recession.Sources: Sources: OECD, Reuters