Coronavirus: the macro context of the escalating crisis

By comparison, the SARS outbreak in 2003 knocked 2.6% off Hong Kong GDP, 1.1% off China and 0.5% off Singapore. The impact was much more muted in US, Japan and Australia the, with these economies suffering mere 0.1% hits.

Fergus Hicks, real estate strategist at UBS Asset Management, explains:

“Increased trade between countries and more international travel lead us to think that the impact of the virus outside of Asia will likely be higher than for SARS. Also, China now accounts for 16% of world GDP compared to just 4% in 2003. The SARS virus infected around 8,100 people globally and resulted in 774 deaths, a 10% mortality rate. The number of infections of the coronavirus so far has reached 60,000 at time of writing, though indications are that the mortality rate is much lower at around 2%. Oxford Economics has cut its global, US and eurozone GDP forecasts for 2020 by 0.2% pts and made a larger cut to China of 0.6% pts.

“The global easing bias in monetary policy from 2019 remains. According to the IMF 49 central banks cut interest rates in 2019 a combined total of 71 times. The Fed and ECB are conducting reviews of their policy frameworks. This may see the ECB’s asymmetric inflation target brought into line with the symmetrical targets of other central banks. The new president of the ECB, Christine Lagarde, is also keen for environmental considerations to be incorporated. At the Fed price level targeting will likely be discussed, along with new measures to prop up the economy should a downturn strike.

“Inflation remains low in most countries, with central banks more focused on boosting than containing it. However, with ultra-low unemployment we believe we should still be aware of inflation risk. Markets expect inflation to remain low. Five-year on five-year inflation swaps – measuring market expectations for inflation over five years, five years from now – remain low and have fallen since the start of 2015. As of mid-February they were below inflation targets for the eurozone (1.2%) and Japan (0.1%). Only in the US are they on target at 2.0%.”

Latest GDP data has been mixed, with the US economy expanding 0.5% QoQ in 4Q19 (the same as 3Q19) though business investment was weak and dropped 0.4% QoQ. The eurozone was weaker than expected and managed growth of just 0.1% QoQ, down from 0.3% in 3Q19. Economies look set to continue grow this year, but at an unspectacular pace. The IMF predicts global growth of 3.3% YoY, up from 2.9% in 2019. However, the coronavirus means the expected acceleration now looks unlikely and growth may not top 3%, says UBS.

james.wallace@realassetmedia.com