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Pandemic risk fuels fears for world economy

The rising risk that a global pandemic could snuff out frail signs of recovery in world economy.

Written by Reuters | Singapore |
April 28, 2009 11:51:34 am

The rising risk that a global pandemic could snuff out frail signs of recovery in the world economy spurred nervous investors to seek safe havens on Tuesday,after the World Health Organisation raised its alert level for a deadly swine flu outbreak that started in Mexico.

Mexican Labour Minister Javier Lozano said the country did not yet plan a mass closure of businesses to try to halt the spread of the disease that has killed up to 149 people so far.

“Economic activity must continue,” he said.

But markets were on edge. Oil dropped a further 1 per cent,sinking below $50 a barrel on concern that a pandemic would damage the already battered world economy and stifle air travel.

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Most Asian stock markets slipped into negative territory after tentative early gains,and the yen climbed to a seven-week high against the euro and a one-month high versus the dollar as investors cut their exposure to riskier currencies.

Drug stocks extended Monday’s gains while airline stocks were hit once again.

The Mexican swine flu outbreak came just as many global policymakers were daring to proclaim the start of a tentative turnaround in the world economy after months of decline.

Now,any recovery is in doubt.

“We almost have to wait to see not so much the contagion aspect but how deadly is this,” said Alan Ruskin,chief international strategist at RBS Greenwich Capital in Connecticut.

He said that while a mild strain would have only a limited global impact,”if you start getting a number of fatalities,then it ramps the issue up substantially at every level,from a human standpoint and from an economic standpoint”.

DOWNSIDE RISKS

The World Bank estimated in 2008 that a flu pandemic could cost $3 trillion and result in a nearly 5 per cent drop in world gross domestic product.

An outbreak of severe acute respiratory syndrome (SARS) which disrupted travel,trade and workplaces in 2003,cost the Asia Pacific region an estimated $40 billion. It lasted six months and killed 775 of the 8,000 people it infected in 25 countries.

In Washington,the Obama administration said it was too soon to determine the potential economic impact but US Treasury officials were monitoring the situation.

Regardless of the effect of the virus on the global economy,the head of the International Monetary Fund said he did not see a global economic recovery before 2010.

IMF Managing Director Dominique Strauss-Kahn told CNBC television he hoped the worst was over but that “green shoots” in the global economy were mostly in the United States.

A Reuters survey of analysts across European and the United States taken April 21-27 found a slim majority saying the bottom had yet to be hit in the worst global recession since World War Two. Most expected the crisis to last anywhere from six months to another two years.

“Financial and macroeconomic stability are still some way off and we don’t yet have the foundation for a solid recovery,” said Lena Komileva,chief G7 market economist at Tullett Prebon.

GM PLAN

General Motors Corp,one of the casualties of the global crisis,announced its final plan to stave off bankruptcy on Monday. It aims to slash its $27 billion bond debt through an equity swap and cut more than 21,000 more jobs.

The move would effectively nationalise GM,putting majority control in the hands of the US government — a controversial issue in a country that has long preached the primacy of markets.

“We strongly back an auto industry that we believe can and should be self-reliant,” White House spokesman Robert Gibbs said. “It is not our desire to either own or run one of the auto companies.”

Chrysler lenders were also expected to receive a new offer from the US Treasury shortly. The company has an April 30 deadline to reach a deal with creditors and cement an alliance with Fiat that would eventually give the Italian firm a 35 per cent stake in the restructured US automaker.

Despite risks of more financial turbulence,European Central Bank President Jean-Claude Trichet said on Monday lowering interest rates may not be the best way to fight a recession.

“Our actions have been different from those taken by other central banks,reflecting differences in economic and financial structures,” he said of the ECB’s reaction to the crisis in a speech to the Foreign Policy Association in New York.

“Indeed,given the different economic structures,they need to be different to reach the same objective.”

The ECB meets on May 7 and markets expect it to cut the benchmark interest rate from 1.25 per cent to 1.0 per cent. The US Federal Reserve starts a two-day meeting on Tuesday and is expected to leave benchmark rates at or near zero.

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