Kevin Hassett, the former economic adviser to US president Donald Trump, has warned that the chance of the global economy falling into a deep recession from the coronavirus outbreak was “pretty close to 100 per cent.”
Hassett, who chaired Trump’s Council of Economic Advisers between 2017 and 2019, estimated that if any given government closed down its economy for just one week to contain the spread of the virus, as Italy had done for much of the country, it was equivalent to around a 2 per cent drop in gross domestic product for a quarter. On an annualised basis, it was -8 per cent.
“If you shut down for two weeks, then you looking at something like a -16 per cent quarter,” he told delegates at the AFR Business Summit in Sydney this week. “You are looking at the worst quarter than most developed nation economies have ever seen.”
The former US Federal Reserve economist said epistemological models would suggest that once 100,000 people have contracted the virus worldwide, the number would likely expand into the millions which could result in governments shutting down economies for multiple weeks. Recent figures compiled by Bloomberg suggest the number of confirmed cases worldwide has already hit 117,895.
“Imagine this thing spreads to millions of people and economies all around the world start to have quarantines,” he said. “Then you are looking at scale, a drop in global recession, that is of the scale of the global financial crisis or even the great depression as an impulse.”
Unlike the global financial crisis, however, Hassett said that once a vaccine and or cure was discovered, governments and markets could then see an end in sight. He also said that while it was very likely that the world would fall into a global recession, it would not be an enduring one.
“We have got a really big negative shock coming but we would also know pretty well when it’s behind us,” he said. “So there is clarity potentially about this process which is quite a big different to other disruptions.”
The Future Fund chair Peter Costello told delegates at the same event that Australia would see a negative quarter for GDP in March, but whether that extended in a second quarter would depend on how long the Coronavirus continued to spread.
“Are we now on the tip of containment? Or is there a second (leg)?” he asked. “To be frank, not one of us knows, but you prepare as if it will go for another month, months, quarters. You would hope you get on top of it quickly. It was the same with SARS.”
The former Federal Treasurer added that the correction in equities, which has erased trillions of dollars from the global market, would reverse once the threat of the virus passed thanks to record low interest rates.
“The thing that has created these huge values (in equities), the underlying driver will still be there once the coronavirus passes,” he said. “That is cheap money and in fact money could be cheaper still. Cheap money builds up asset prices and that always causes corrections.”
Costello also said that the Reserve Bank of Australia’s recent interest rate cut to 0.5 per cent would do little to stimulate the economy.
AustralianSuper’s chief investment officer Mark Delaney said at the same event that there was now a 50 per cent chance that RBA would start using quantitative easing to try and stimulate growth. He also said that the sell-off had not changed his view on the market and or sectors.
“The markets have been rewarding secular growth stocks,” he said. “As long as they don’t become too expensive and that secular growth seems to remain in place, I think they will continue to be a place to invest.”