Capital Economics has estimated that the cost of coronavirus in lost global productivity could be worth up to $280 billion, but really this estimate is based on containment expectations that are grounded in scenario assumptions, rather than expectations based on vaccine progress. Ground zero for the virus’ transmission from animals to humans was in the Hubei province of China, in Wuhan, arguably the most disruptive location for the epicentre of an epidemic to be given country’s centrality to global supply chains.
It is also a reminder – should we need it – that China, which is emerging as the largest economy of the world, is vital to the world economy though it poses a higher risk profile as a developing, middle-income country relative to world’s largest major developed economies, such as the US, Germany, Japan and even the UK.
“With the world now more interconnected with China than ever, issues like this ripple through the global economy in a way they would not just a decade or two ago. The responses to the crisis – quarantines, shutting down stores and factories, travel limitations or bans – will likely produce an impact, primarily on China’s economy and secondarily on the global economy and the US economy. Much of this should only temporarily hit economies because it concerns the movement of people, not goods. That will likely persist, even after the cause becomes resolved, a phenomenon in economics known as hysteresis. Ultimately, much of any slowdown will reverse, but some will not. For now, the situation seems more temporary than permanent disruption, but the situation remains highly idiosyncratic and should increase market volatility.
“For commercial real estate (CRE), geopolitical risk is becoming a feature of the economic landscape, not a bug. The sector thus far has sloughed it off well with fundamental and capital market performance driven by economic factors. Our view on that has not yet changed. Hotel demand and travel-oriented retail could take a small hit, though we don’t anticipate significant fallout in the U.S. and any impact should largely reverse over time. Other sectors should see little direct impact. Uncertainty surrounding the outcome of the election should produce a marginal impact on spending, contributing to the slowdown in GDP growth this year. That should produce a somewhat greater consequence for CRE, but nothing significant. In sum, CRE should continue to largely ignore geopolitical concerns. The pullback in non-residential construction could reduce the development pipeline in the coming quarters. Although development remains in check this cycle, reducing it further could put marginal upward pressure on the pricing of existing assets.”