Can the US Prop Up the Global Economy?

During this Lunar New Year, many stockholders were anxious as the coronavirus, or COVID-19, wreaked havoc over the holiday. The U.S. stock market plummeted while the Taiwan market was closed, and when it reopened for business, the New Taiwan dollar had depreciated by .27 in Taiwan dollars. The larger market dropped 696 points in a 5.75% decline, the worst performance ever on the first day after the Lunar New Year holiday. The coronavirus has created problems that have become a national risk, and such risk is the most critical kind geopolitically. Political instability, wars, natural disasters and man-made disasters are all national risks. At the beginning of the year, the assassination of Iranian Gen. Qassem Soleimani by the U.S. increased the risk of conflict; not long after the situation de-escalated, that tension was quickly replaced by the coronavirus, whose lethal nature and scope remain unclear.

Since its sharp decline, the Taiwan stock market has recovered, following the recovery of the U.S. market. U.S. and Chinese gross exports account for 40% of global exports, and have been the pillars of this year’s economic growth. Now, however, many cities in China are under lockdown due to the coronavirus, and people are unable to travel at will. Airlines are increasingly halting flights to China, and countries are restricting entry of Chinese people. All of this will greatly affect global supply chains and consumption. China’s gross domestic product growth this year will certainly not reach 6%; it will probably be closer to 5%. Whether the U.S. can prop up the global economy on its own and keep everyone optimistic about the economy and stock market this year is a question worth considering and one that is closely related to investment strategy.

Despite geopolitical risk, the U.S. stock market has not lost momentum, but has remained strong. Years of monetary easing have left the U.S. with too much idle money that must go somewhere. The risks and returns of other investment channels are not as good as those of the stock market. Even with low interest rates, the stock market remains attractive. The impetus behind U.S. economic growth is consumer spending, which accounts for 68% of the country’s gross output. Recent consumer spending has been optimistic and grew 1.8% in the last quarter of 2019. U.S. companies are highly competitive internationally, and new technology that incorporate innovative business models (such as Microsoft’s cloud services), combined with strong financial institutions and markets, are gaining ground all over the world. Everyone who is anticipating future profits for their companies feels that current stock prices are not too high.

However, the importance of the U.S. economy to the global economy is diminishing and already accounts for less than 25%. If the global economy is poor, the U.S. economy will be affected, too, just as it was by the U.S.-China trade war. Although the goal of the U.S. was to hurt China, it couldn’t escape being hurt itself, and so finally signed the first phase of a trade deal on Jan. 15. The spread of the coronavirus has yet to peak, and the number of new cases continues to climb daily by the thousands. The number of deaths is also increasing every day. If the situation takes too long to resolve, Chinese consumption, travel and production will be severely hit, affecting other countries. When the outlook for U.S. company growth becomes poor, consumer confidence will be affected, and U.S. economic growth will be hindered, sending the global economy into a vicious cycle.

Taiwan is closely connected to China in the global supply chain. The tourism and education industries will be severely hit when Chinese tourists and students stop coming. Taiwan’s economy is more susceptible to the influence of the coronavirus than those of other countries. If things go badly, the economy will enter into a slump for a time, but the geopolitical risk posed by the coronavirus will eventually pass. As long as no other risks emerge to take the virus’ place, the economy will get back on track.

The author is a professor in the Department of Finance at NCCU College of Commerce.