Global growth was weak and slowing into 2020 and Coronavirus is magnifying the trend.

An estimated two-thirds of the Chinese economy–representing 17% of global GDP–is closed down indefinitely, some 80% of its manufacturing. Global supply chains are feeling the hit. South Korea, the world’s fifth-largest automaker, has closed all of its factories on a lack of parts. Airlines from 30 countries have canceled their flights to and from China. The Chinese people who can afford international travel are big spenders–they’ll be missed all over. Ambrose-Evans Pritchard gets straight to the point this morning in China’s Coronavirus is not remotely under control and the world economy is in mounting peril.

Australia’s Prime Minister admits that the impact on the Aussie economy will be ‘very significant’.With China, the largest importer of oil and metals, commodities and producers are in for further pain. British Petroleum estimates that global oil demand in 2020 could be 40% lower on all of the impacts.

All of this was predictable. Human life is full of risks and sudden shocks are typical. Our health before one hits often plays a defining role in the damage done and recovery thereafter.

Experts assure us that the medical system is much better equipped to handle the Coronavirus today than it was for the SARS outbreak in 2003—we hope this is right, however, the opposite is certainly true of the financial system.

In 2002, as SARS hit, the world was emerging from recession and a two-year bear market that had already wiped out weak companies and knocked 50 to 80% off the price of survivors. Investment valuations and dividend yields were the best in a decade, even as sentiment was dark and pessimism rampant. Fraudsters were on the run, and financial hubris had transformed into contrition.

In short, in a world pricing worst-case scenario there was much room for an upside surprise in 2002.  As we can see in the below chart of the world stock market price (MSCI Word Index) since 1970, and the price impact of past pandemic threats, today, the polar opposite is true. 

(Click on image to enlarge)

Credit abuse has extended the life of companies and households with unsustainable financial models all around the world. Today, the level of the household, corporate and government debt relative to income has never been higher.

Expansion, mergers and the accumulation of uneconomical assets has continued so long as more cheap debt could be added, and central banks have done everything possible to enable it.

Now, interest rates have moved up, defaults are spreading and loans are harder to find. Defaults spread pain from borrowers to lenders, to the economy and taxpayers. It’s no surprise that global business surveys are finding recession risk as a top concern in 2020–preparedness and resilience are at rock-bottom levels.

Speaking in the European Parliament this morning, new ECB chief Christine Lagarde joined a chorus of central bankers in recent months who’ve tried to lower expectations for more monetary tricks to the rescue, saying:

“This low interest rate and low inflation environment has significantly reduced the scope for the ECB and other central banks worldwide to ease monetary policy in the face of an economic downturn.”

Undoubtedly, this is true. Indeed, years of ‘ease’ have made us all the more vulnerable.