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Coronavirus: identifying real and perceived risks to global economy

Christopher Smart, chief global strategist and head of the Barings Investment Institute cited five examples of the clearing picture of were damage to the global economy does, and does not, exist:

  1. initial direct harm to the Chinese economy (responsible for more than a third of global growth). “Retail sales, travel and energy consumption have all collapsed as the official annual target vanishes in the distance.”
  2. Countries dependent on exports to China will suffer. “Asian neighbors are hit directly, but German manufacturers and American farmers will be affected, too.”
  3. supply chain disruption losses. “Apple has already reduced its guidance, but the impact will ripple far beyond. You can’t sell a phone if you don’t have all the parts; you can’t sell a dress if you don’t have the dress.”
  4. Fresh cases of the virus in Korea, Japan and Italy have dealt a direct blow to travel tourism and retail activity in affected areas around the world. “Worries center around less-developed countries that don’t have the infrastructure to diagnose and contain the disease.”
  5. Equity markets have slumped on mounting uncertainty to earnings estimates, while commodity prices have fallen on weaker demand expectations and government bond yields have set record lows.

Barings’ Christopher Smart added:

“Economically, governments and central banks are standing by with fiscal and monetary measures to support faltering demand, even if some question how much difference they can make. This may yet trigger the global recession that many have been expecting, but it’s still too soon to tell. There’s still a reasonable possibility that monetary easing coincides with the containment of the disease, at which point markets may snap back. Most economists and analysts make terrible epidemiologists, which means that projecting how the disease will drive markets in the near term remains full of uncertainty. Careful investors will be watching closely, moving cautiously and focusing as best they can on long-term fundamentals.”

Neil Shearing, Group Chief Economist at Capital Economics, explains:

“We now expect global growth to fall to around 2% this year. This would be the weakest pace of annual growth since the height of the global financial crisis in 2009. But the risks to the forecast are probably still skewed to the downside. The policy response is complicated by the fact that the economic shock caused by the virus affects both the supply- and the demand-side of the economy. There’s not much that monetary or fiscal policy stimulus can do to address the former. And it’s doubtful that it can do much to support demand in the very short term either, given the time it takes for looser policy to filter through to the real economy.”

james.wallace@realassetmedia.com