As coronavirus fear weighs on the markets and squeezes economies, collapsing oil prices are quietly undercutting the chances of a recovery, according to one economist.
Frances Donald, Manulife’s global chief economist and head of macro strategy, sees the shock to oil as a much bigger threat than most realize.
“Everybody knows it’s going to be the biggest contraction in modern economic history,” she told Yahoo Finance in a recent interview.
“Everyone talks to me about COVID-19, and what the Fed is doing. But this oil price collapse is so significant to the markets and to growth. We’re not just talking about investment pulling back. This has implications for the U.S. dollar. It’s related to a huge deflationary shock that’s about to come.”
Waning energy use as business activity and travel slow due COVID-19, and the Saudi-Russian price war, have delivered a rare combination of demand and supply-side blows to the global crude market. Prices for U.S benchmark West Texas Intermediate (CL=F) and European Brent (BZ=F) crude were cut in half in March. Western Canadian Select dipped into the $3 per barrel range.
Global stocks have been under immense pressure in recent weeks, finding respite at times when governments roll out stimulus packages aimed at shielding national economies.
Donald said the added question mark of the global medical response to the unfolding global pandemic makes it near-impossible to forecast the shape of any recovery. However, it’s clear to her that oil will need to strengthen in order for that to begin in earnest.
“When you have oil shocks that are of this magnitude, they change the balance of the economy,” Donald said.
“We need those oil prices to stabilize, because if we have negative oil, or oil running in the single digits, it’s really difficult for us to be bullish on our recovery and economic growth.”
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.