Under more normal circumstances a one-third crash in the price of oil might be a cause for celebration. It would mean cheaper motoring, lower costs for businesses and lower home-heating bills.
But the global Covid-19 scare that caused the price crash and triggered a spine-chilling collapse in share prices on both sides of the Atlantic is an ominous sign that we are living in dangerous economic times.
Financial markets and the international economy are facing their biggest challenge since the 2008-09 banking crisis, which savaged growth and household incomes – with effects still being felt more than a decade later.
Yes, bigger firms may be able to withstand the pressure, many are sitting on healthy cash resources held back as a result of the uncertainty over Brexit. But smaller enterprises are far more vulnerable.
The FTSE 100 nosedived after markets opened on Monday and lost more than seven per cent
UK’s coronavirus market decline is equal to that seen in the 2008 financial crisis
Oil also spiralled down after Russia and Saudi Arabia entered a price war as demand for the commodity is expected to slide
That is why I would expect the new Chancellor Rishi Sunak – almost certainly with some support from the Bank of England – to come up with a range of emergency measures to ease the pressure on smaller firms in tomorrow’s budget.
The truth is that the financial and economic backdrop to tomorrow’s Budget could not be more frightening. The collapse in the oil price to just over $35 a barrel is the biggest such fall since the 1991 Gulf War.
It is the kind of disorderly shock to markets that policymakers dread and it has had a devastating impact on share prices in Britain, across Europe and around the world.
On Wall Street, in the latest trading, a 7 per cent fall in the key Dow Jones index was so disruptive that the New York Stock Exchange triggered circuit breakers that automatically stop trading until conditions calm down.
Here at home the share price of BP, which is an essential building block of almost every pension fund, insurance investment and equity ISA, plunged by 20 per cent.
Together with other dramatic declines in stock prices, it means that since January 20 – when the coronavirus starting to cause market ructions – the FTSE All-Share Index, the broadest measure of equity investing in the UK, has plummeted by more than 22 per cent. That is equivalent to one fifth of the value of a defined contribution pension fund that moves up and down with the markets.
A Sydney trader looks at a sea of red as the Australian Stock Exchange suffered its worst falls for 12 years after it emerged that coronavirus is now expected to tip the country into recession sending shock waves through world markets today
Trader Gregory Rowe pictured on the New York Stock Exchange on Monday as markets fell
The worry is that City markets have fallen rapidly from what is termed a ‘correction’ (defined as a 10 per cent decline in prices) to a bear market (a fall of 20 per cent over short period of just two months).
According to research by the stock-broking firm A J Bell, this is the 11th such bear market since the current FTSE Indexes were launched in 1962. The broker describes bear markets as ‘brutish and nasty’ – adding that the best than can be hoped for is that the loss of confidence is over quite quickly.
Economists are often sceptical about sudden stock market setbacks. But they can act as the canary in the mine, signalling an oncoming slowdown or slump.
The Paris-based official think tank the OECD has cautioned that the already weak growth among the most advanced countries could be halved.
The critical difference this time, compared with previous crashes such as that of 2008, is that the coronavirus is not only affecting demand for goods and services but also supply.
This means this economy will not so easily be brought back to life by slashing interest rates and pumping credit into the financial system. Where demand is concerned, easy credit in the current perilous circumstances is not going to tempt people into going on a cruise, or into flying or going on a major shopping expedition, however easy it may be to run up a credit card bill.
When one of the virus victims is the head of the New York Port Authority, Rick Cotton, who among other thing runs JFK and spends his time visiting other airports, it does not exactly inspire confidence in jetting off anywhere.
Traders pictured on the New York Stock Exchange floor as the value of shares collapsed
The interest rate cuts already made by the US, Australian and Canadian central banks – with the Bank of England and the European Central Bank likely to follow suit very soon – are having a limited effect on enticing people to spend.
The best that can be hoped for is that they ease the pressure on those companies, including some of the shopping giants, that carry large debts on their balance sheets.
Meanwhile, on the supply side of the economy, the health scare has rapidly demonstrated the downside of globalisation.
The dependence of the UK and other developed economies on foreign spare parts, clothing and even foodstuffs means that UK and global production lines are stuttering. On top of this you have the potential disruption to businesses caused by self-isolation and working from home.
The IMF’s chief economist Gita Gopinath warned yesterday that while ‘the drop in manufacturing is comparable to the start of the financial crisis, the decline in services appears larger this time reflecting the large impact of social distancing’.
The IMF’s assessment is a dreadful development for Mr Sunak. More than 70 per cent of Britain’s total output or gross domestic product comes from the services sector, consisting of everything from insurance and banking to architecture, music and the law.
These services are vital to foreign earnings and have been considered the new great hope for Britain as the country leaves the European Union.
A trader speaks into a headset as stocks continued to tumble at the New York Stock Exchange
The combination of lower growth and pressure on the service sector means less revenue for the Exchequer, which in turn places an additional squeeze on the public finances.
Mr Sunak had intended a big spend and invest budget as part of the process of ‘levelling up’ – ploughing money into the regions – promised by Boris Johnson’s government.
The best that can be hoped for is that Covid-19 is contained rapidly in the first two quarters of the year and that the UK and global markets and economies then smartly bounce back.
The alternative of a long period of slumping output, surging unemployment and badly depleted pensions and savings doesn’t bear thinking about.
The Chancellor must, however, be prepared for the very worst. As he’s rapidly finding out, being at No 11 Downing Street is a bed of nails – and not just because of interference from next door.