THE ECONOMIC IMPACT OF A GLOBAL PANDEMIC: Can We Expect a Recession?

• Author: Sonora, Robert

On December 31, 2019, in the city of Wuhan, China, a port city of 11 million people, the World Health Organization (WHO) was informed of several unusual of pneumonia. A week later, the WHO announced they had identified a new virus, part of the coronavirus family, and named it COVID 19.

The first death in the U.S. was on March 5 in Washington state. By that time the global death toll had grown to about 3,500 people. By the first week of March, Italy had closed all its schools. By March 11, the Trump administration had restricted travel from Europe for 30 days. A day later, the WHO would report over 117 countries with confirmed cases of the illness--the number of infected reaching over 125,000.

The effect of the coronavirus outbreak has rippled through global economies. The S&P 500, which had peaked at 3,386 on February 19, had fallen roughly 25 percent to 2,532 by March 12. The VIX index, which measures stock market volatility and is often referred to as the fear index, reached 75.5--its highest level ever.

Over the same period, the benchmark 10-year bond yield fell 1 percentage point to .84 percent--after bottoming out at .54 on March 9--as investors fled to safety. While longer maturity bond yields have generally drifted downwards over the past 40 years, the deviation from the long run trend (about -1.8 percentage points) is on par with the rates seen during the last financial crisis.

Figure 1 shows the 10-year bond yield and the VIX index, July 1, 2019, through March 12, 2020. The 10-year bond yields dropped dramatically at the end of February. As of mid-March, 10-yearyields have stabilized between .50-.75 percent.

Figure 2 shows the S&P 500 index for the same period. Together the data show the significant global economic impact of COVID-19. Movement in each of the indicators represent new information and uncertainty regarding the future of this pandemic.

Lost in the hubbub is the recent price war between Russia and Saudi Arabia that drove oil down to below $40 a barrel--futures markets forecast sub-$50 until December 2023. Break even for the Bakken oil field in North Dakota is $50 bbl (barrel of oil). Add to that the ongoing trade war, uncertainty surrounding Brexit and you have a potent brew of economic turmoil. Though none of these events have had a similar impact on financial markets as COVID-19 has--tariffs imposed by the U.S. increased the VIX index to 40.7.

Financial markets are interpreted as a barometer of the underlying health...