Analysts weigh in on the potential economic impact of the viral outbreak
Could the coronavirus cause a global recession? That question is worth examining, considering emerging volatility in financial markets as fears about the spreading coronavirus increase.
“The world is waking up to the reality of the situation as the containment of coronavirus hasn’t yet materialized, and confirmed cases soar in different countries,” said Nigel Green, founder and CEO at financial consultancy deVere Group, in a release on Wednesday.
Those countries include Korea, Japan, Iran and Italy. The number of new cases reported this week was, for the first time, greater outside China than inside, according to the World Health Organization.
The coronavirus’s potential impact on markets is compounded by various other challenges.
“Investors also need to consider the impact of the U.S. presidential election, the tensions between Iran and the U.S. and how oil prices will be hit if these intensify,” Green said.
Further, the trade war between the U.S. and China continues to simmer. “China’s current economic slowdown will reduce the country’s ability to buy $200 billion more U.S. goods, as promised in the Phase 1 trade deal,” Green said.
These factors, together with the coronavirus, could “push the world to the brink of a global recession this year,” he said.
BMO’s chief economist Douglas Porter was more measured in a report also released on Wednesday. His analysis indicated that, while economic growth will likely take a hit from the virus, recovery is likewise a reasonable expectation.
After analyzing 17 different pandemic models in various countries, Porter said the median estimate of the economic growth hit to domestic economies was 1.6 percentage points in the first year, with an almost complete rebound the next.
Further, a reasonable assumption is that recovery from a growth hit would be V-shaped, Porter said. “Past pandemics have not lasted much beyond a quarter, and typically the economic recovery is swift,” he said.
For example, while China will no doubt take an economic hit in the first quarter of 2020, “we continue to believe that activity will fully rebound by Q3 (with supply-chain issues delaying the recovery by a quarter),” Porter said.
(Regardless of the coronavirus, Canada’s growth expectations will likely soon see “significant” revisions, Porter added. GDP results for the fourth quarter of 2019 will be released this coming Friday and are expected to show no growth — during a period when the coronavirus wasn’t yet an issue.)
Porter’s bottom line was that while the coronavirus’s spread means risks to the global economy have increased, the economic fallout would likely be equivalent to a “short, sharp shock to growth,” followed by recovery.
While Green said he expects the world to “narrowly” avoid a recession in 2020, markets will be “jittery triggering sell-offs” until new coronavirus cases peak and governments pump liquidity into the markets.
In the meantime, with the increased volatility, Green said he’ll be revising his portfolio and “drip-feeding new money into the market to take advantage of the opportunities whilst reducing risk at the same time.”