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Global Economic Policymakers Scramble as Coronavirus Threatens Growth

Economists slashed growth forecasts, and officials rushed to put a floor under the impending damage.

A car seat assembly line in Shanghai. Outbreaks of the coronavirus in China, Japan, Iran, Italy and South Korea have closed many factories and slowed or halted tourism.Credit...Aly Song/Reuters

Global policymakers moved to ease public anxiety over the coming economic hit from the coronavirus on Monday, as analysts warned of a severe slowdown in growth and a possible recession if the virus continued to spread.

Finance ministers and central bankers from the world’s advanced economies said the Group of 7 would hold an emergency call on Tuesday morning to discuss economic responses to the outbreak. The World Bank and International Monetary Fund signaled they were also ready to provide assistance, particularly to poor nations. Monetary policymakers from Japan to Europe on Monday pledged to act as needed to stem any economic fallout as infections spread.

The rush of reassurance came amid increasingly dire economic projections tied to the coronavirus, which is spreading outside of China to South Korea, Italy, France and the United States, idling factories, quarantining workers and curtailing international travel.

The Organization for Economic Cooperation and Development said global growth could plummet to just 1.5 percent in 2020, far less than the 3 percent it projected before the virus surfaced, should the outbreak sweep through the Asia-Pacific region, Europe and North America. If things get bad enough, Japan and Europe could plunge into recession, the O.E.C.D. warned. Predictions for the United States were nearly as bad: Most analysts expect zero or negative growth in the second quarter, with some forecasting a potential recession before year’s end.

That glum outlook sent stocks in Europe temporarily lower, but expectations for a far-reaching global response — including the potential for a coordinated interest rate across central banks — helped to stem market bleeding.

The S&P 500 posted its best gain in more than a year, rising by more than 4.6 percent, amid a surge in interest-rate sensitive sectors such as utilities and real estate. Treasury yields continued to tumble, hitting a record low, as investors bet that the Fed will cut interest rates by half a percentage point at its next meeting.

“It has already stoked expectations of a coordinated cut,” Roberto Perli, a former Federal Reserve researcher who is now an economist at Cornerstone Macro, said in an email following news of the G7 meeting. “If it doesn’t happen, it will only add to market volatility.”

President Trump joined in pushing for Fed action on Monday, saying that Chair Jerome H. Powell and his colleagues should quickly slash interest rates as economic risk from the virus becomes more stark.

“As usual, Jay Powell and the Federal Reserve are slow to act,” he wrote on Twitter.

Later, when asked about the state of the economy amid a tumultuous financial week, the president noted that “the market’s up today” and insisted, “Our country’s very strong economically.”

But he said he would like the Federal Reserve to do more to address the financial challenges posed by the spread of the coronavirus.

“I don’t think the Fed’s looking at it,” he said, “but they should be.

A senior administration official, who was not authorized to speak publicly about the administration’s response, said Mr. Trump and his advisers were not discussing any fiscal stimulus measures, such as immediate tax cuts, because they viewed any damage from the coronavirus as likely to be temporary. Still, the official said, the White House wants the Fed to cut rates, in part to halt a decline in commodity prices.

Mr. Powell has not committed to lowering borrowing costs, which are already in a range of 1.5 percent to 1.75 percent, lower than in previous expansions. But he signaled on Friday that the Fed was ready to act to support the economy. Investors now expect the Fed to slash rates by half a percentage point at its March meeting or even before, and see borrowing costs drop as much as a full point lower by the end of the year.

Even if the outbreak is mild and mostly contained outside China — the O.E.C.D.’s expected scenario — global growth could be reduced about half a percentage point relative to previous forecasts, according to an update that the group released on Monday ominously titled “Coronavirus: The World Economy at Risk.”

Goldman Sachs economists expect global growth to slump to around 2 percent for the full year, down from their previous 3 percent forecast.

Neil Shearing, group chief economist at Capital Economics, wrote in a note Monday that in a good scenario, global growth will fall to 2.5 percent this year — the weakest pace since 2009. In a bad scenario, it could shrink by 0.5 percent, a contraction on a scale with the financial crisis.

Growth in the United States is also at risk from the virus, especially if the number of infections continues to rise. Goldman Sachs economists said in a note Sunday that “while the U.S. economy avoids recession in our baseline forecast, the downside risks have clearly grown.”

Deutsche Bank’s economics team changed its baseline forecast to expect the economy to shrink in the second quarter, with the stock market falling 20 percent below its recent peak, before rebounding in the fall. Its new “worse case” forecast sees the United States entering recession before year end.

The exact outcome is hard to quantify because the risks posed by the coronavirus are inherently unpredictable.

It is unclear how far infections will spread, making it difficult to estimate the economic fallout from such actions as widespread quarantines and supply chain disruptions. Outbreaks in China, Japan, Iran, Italy and South Korea have already closed many factories and slowed or halted tourism. Even in the United States, which has had few cases, major companies like Twitter and Amazon have curbed business travel.

The economic impact is slowly filtering through the real economy. Priya Misra, a rates strategist, spends a lot of time thinking about the path of economic growth, so it raised alarm bells in her mind when her employer, TD Securities, cut her international business trip short last week.

It was part of the company’s new ban on nonessential trips. Her concern only grew on Monday, as clients who were planning to come to her from other parts of the United States rescheduled in-person meetings to phone calls. And it crescendoed when an out-of-town client told her not to drive to their office — outsiders were no longer allowed into the building.

“That’s why I think the growth impact is still not understood — people don’t travel, people don’t plan vacations,” she said. “Manufacturing was already weak, but will we now see it in consumer spending?”

If they last, preventive measures like travel limits and partial quarantine could have far-reaching implications. Airlines, hotels and conference centers might suffer. Consumer spending, the backbone of an 11-year-long economic expansion in the United States, could weaken.

In China, where the virus has raged for about two months, data already suggest unexpectedly large economic costs. Two gauges of manufacturing activity slumped in February, with the Caixin manufacturing index falling to the lowest level in its history, according to data released Monday. Real-time trackers of Chinese activity, from coal consumption to property sales, remain severely depressed.

Central banks have pre-emptively signaled that they stand ready to act as the damage mounts. The Bank of Japan, European Central Bank and Bank of England issued statements of their own on Monday, signaling preparedness.

“The Fed-led pivot reflects the global spread of the virus and its economic disruptions, sharp equity market weakness and an emerging realization that corporate cash flow problems could create strains in credit markets,” Krishna Guha and Ernie Tedeschi at Evercore ISI wrote in a note after the announcements.

But central bankers have far less room to loosen monetary policy today than they did heading into the 2007 recession. In the United States, the federal funds rate was above 5 percent back then and was ultimately lowered to near zero.

Laurence Boone, chief economist at the O.E.C.D., said in a conference call on Monday that she welcomed expressions of resolve by central banks, but that the onus was also on elected officials.

“Regardless of how the virus spreads in coming days and months, we call on governments to take action now,” Ms. Boone told reporters.

Political leaders could provide incentives for companies to shorten work hours rather than lay people off, or delay tax payments for small businesses suffering from plunging sales, for example. Ms. Boone said it would be “a very positive signal” if the United States and China were to drop the tariffs they had imposed as part of a trade war.

“This is not a shock that central banks alone can address,” Ms. Boone said.

While officials in the United States wait for the Fed to act, government help is more forthcoming in parts of Europe. Italy has already announced a stimulus package, and the French finance minister, Bruno Le Maire, said on Monday that the government would “unlock whatever it takes” to help French companies.

“We will show complete solidarity vis-à-vis all contractors that today are on the front line,” he said.

Liz Alderman, Matt Phillips and Jim Tankersley contributed reporting.

Jeanna Smialek writes about the Federal Reserve and the economy for The New York Times. She previously covered economics at Bloomberg News, where she also wrote feature stories for Businessweek magazine.  More about Jeanna Smialek

Jack Ewing writes about business, banking, economics and monetary policy from Frankfurt, and contributes to breaking news coverage. Previously he worked for a decade at BusinessWeek magazine in Frankfurt, where he was European regional editor. More about Jack Ewing

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Economists Worldwide Cut Outlook On Growth. Order Reprints | Today’s Paper | Subscribe

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