At the start of this year, the global macroeconomic outlook seemed to have improved. Growth appeared to have bottomed out, as monetary easing and the phase-one US-China trade deal brought relief to markets. But the outbreak of the coronavirus has clouded the outlook.
While the virus has spread beyond China, the world’s most populous country will bear the brunt of the impact. Chinese GDP is expected to be 0.2-0.4 percentage points lower than it would have been in 2020, and it is likely that output will contract in Q1.
Chinese output is currently frozen: the Chinese New Year holidays have been extended for a week, which means that companies accounting for 70% of GDP are closed. It is still unclear whether there will be a full resumption of activity next week – at the moment, this seems unlikely.
While the crucial assumption is that the epidemic will be successfully contained in six to eight weeks, in reality we know very little about the likely length and severity of the virus. Comparisons are being drawn between the current outbreak and the severe acute respiratory syndrome (SARS) outbreak in 2003. SARS provides an indication of how global epidemics can affect growth, with an initial hit to the economy followed by ‘v-shape’ rebound in activity.
But this exercise has its limits, mostly because coronavirus is likely to have a far more global impact than SARS did. China now accounts for 16% of the world economy, compared to 4% in 2003. Global growth – though improving – still remains sluggish and vulnerable to external shocks.
Much hinges on Beijing’s response to the epidemic. The government is likely to unleash substantial stimulus into the economy and Chinese banks will be asked to rollover loans, cut interest rates and extend more credit to keep disrupted small-and-medium enterprises afloat.
In the long run, there are longer term and potentially more potent risks to the global economic outlook, including protectionism and climate change. While the coronavirus poses headwinds, the overall impact on global GDP – a reduction of 0.1-0.2 percentage points – is material, but manageable in the long term.
And while global growth may take a hit, credit is likely to weather the storm better than equities in the first instance. Regardless, the virus will still have a near-term effect on different industries that our credit analysts cover. Below, we detail their views on how the epidemic will affect a range of sectors.
Investment views from our credit desk