The Virus, the Panic and the Risk of Recession in Brazil and the World.

Panic has taken over the financial markets in the last few weeks. Stock exchanges, commodity prices and the value of currencies of countries with less solid economies collapsed all over the world.

Panic in financial markets comes from the paralysis of the economy which ensues measures taken to contain virus transmission. In an increasing number of countries people avoid to go out of the house to work or travel, schools are closed and hundreds of millions of people are in quarentine regions.

The negative impact on the world economy started in China, where the outbreak started. China accounts today for nearly 1/3 of world industry. Its stoppage affects industry all over the world which depends on Chinese components. In January and February industry shrunk 13.5% and retail sales in China dropped 20.5% in February.

After causing much damage in Asia the virus disseminated to Italy. At the height of winter, in cold weather, with an old population — therefore more vulnerable — and open frontiers to the European Union, the outbreak spread out to Europe and the rest of the world, including to Brazil.

The paralysis of economic activity in reaction to the virus, in its turn, knocked down oil demand in the world. In order to contain the drop in prices OPEC — the Organization of Petroleum Exporting Countries — led by Saudi Arabia, tried and failed to convince Russia to cut their production too. Russia is one of the largest oil producers in the world but it is not a member of OPEC. So Russia did not go along with the plan and Saudi Arabia — the largest oil producer in the world — decided to let oil price collapse, thus reducing the income of all oil exporting countries, including some in rather delicate situations, such as Venezuela and Iran. With less money from oil sales, the economies of these countries will get a lot worse and social discontent with their rulers will increase, along with more demonstrations against them. How will their governments react? No-one knows, but it suffices to remember the recent Iran/USA conflicts. Besides, the substantial drop in oil price may undermine the development of several promising energy technologies, still in the bud all over the world.

This is just one example of how the deterioration of the economic scene unveils dormant conflicts dampened by the bonanza of the longest cycle of global economic expansion since at least WWII. With the brutal destruction of wealth that is taking place, conflicts hatch and increase the negative effect on the economy: a vicious cycle both at global level and within each country. In the realm of politics, for instance, governments the world over benefitted politically from said bonanza. Opposition to current governments will now benefit from social dissatisfaction towards current administrations, which will grow in case a global recession sets in and further disrupts the economy of each country, and this seems increasingly likely. In countries with presidential elections, such as the USA, the consequences will be even more significant. In fact, Goldman Sachs only just cut the growth rate forecast for the American economy to mere 0.4% this year, with a 5% drop in the 2nd quarter. If this forecast materializes, it will be the largest drop since at least the II World War.

No-one knows yet for sure how this disease outbreak will evolve in Brazil and in the world, nor the reactions to it by peoples and governments and the full extent of their effect on the respective economies. The possibility, however, that did not exist before, of a contraction in the Brazilian GDP this year — is now an absolute reality.

Ricardo Amorim is the author of the best-seller After the Storm, a host of Manhattan Connection at Globonews, the most influential economist in Brazil according to Forbes Magazine, the most influential Brazilian on LinkedIn, the only Brazilian among the best world lecturers at Speakers Corner and the winner of the “Most Admired in the Economy, Business and Finance Press”.

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Translation: Simone Montgomery Troula

Economista mais influente do Brasil de acordo com a Forbes, maior influenciador brasileiro no LinkedIn e ganhador do Prêmio iBest de Economia e Negócios.