Will the coronavirus cause a recession?

Hard as it is to envision, the world’s second-largest economy is coming to a near standstill. Infections and fatalities are mounting. Many of my acquaintances and friends in China tell me they are increasingly concerned about the government’s ability to control the epidemic and its economic fallout. Big urban manufacturing and financial centers remain on at least partial lockdown, migrant laborers are unable to return to work, and factories are unable to get raw materials or ship their goods out reliably.

Consumption has also been cut drastically, as people mostly stay indoors. Service industries such as tourism and restaurants are being hit especially hard. Companies in this sector, as well as small manufacturers, have been driving China’s employment growth, but they tend to have little financial cushion.

Beijing does have room to increase public spending, cut taxes and provide cheap credit to bolster growth. China’s central bank has already taken measures to loosen monetary policy. Flooding the economy with cheap credit will increase risks to the banking system, which the government recognizes, but these are desperate times.