The coronavirus epidemic is creating economic shockwaves.
The coronavirus has killed more than 1,100 people and infected more than 45,000 around the world as of mid-February. While the vast majority of cases are in mainland China, other countries are experiencing outbreaks as well. The contagion has rattled global markets and is expected to slow growth in Asia and elsewhere, depending on how long the outbreak continues and how governments and businesses respond.
Already, central banks in Southeast Asia have slashed interest rates and commodity producers in Africa and the Persian Gulf are feeling the pinch of slower demand for energy in China and lower prices around the world. S&P Global Ratings in early February cut its 2020 GDP growth forecast for China to 5% from 5.7% due to the coronavirus, assuming it is contained by March. S&P notes that China accounts for roughly one-third of global growth, and its slowdown will be felt broadly.
“The recent emergence of the coronavirus could lead to disruptions in China that spill over to the rest of the global economy,” the U.S. Federal Reserve said in its latest semiannual report to Congress. Since concerns about the virus shot up in late January, Asian equities have declined around 6% and oil prices 14% while safe-haven assets such as gold and U.S. Treasury securities have gained.
“The relatively strong market response to the virus illustrates how markets tend to react to negative news when valuations for most risky assets appear high and investor positioning in some areas looks stretched,” says Dirk Effenberger, head of investment risk in the Chief Investment Officer at UBS Global Wealth Management. “Monitoring key risks is warranted, as markets tend to be more vulnerable to setbacks at an advanced stage of the cycle.”
Moreover, slower growth will increase skepticism of China’s ability to fully adhere to its new trade agreement with the U.S., which has measurable, quantifiable targets for purchases of broad categories of US goods,” says Marc Chandler, chief market strategist at Bannockburn Global Forex.
“The outbreak also triggered what arguably is a long-overdue unwinding of risk trades that had spurred significant rallies in equities, emerging markets and credit,” he adds. But the downturn is unlikely to last. “Investors cannot sustain a high level of anxiety for long. The commercialization of a vaccination, the reopening of China’s markets and the lifting of the travel bans are steps necessary to rebuild investor confidence and risk appetites.”
One hopeful sign: central banks in Southeast Asia have responded quickly to the threat by slashing interest rates. The Bank of Thailand cut its key lending rate by a quarter-point to 1% and projected the Thai economy will grow more slowly than previously expected in 2020. The Singapore Monetary Authority signaled it would allow the Singapore dollar to depreciate within its set band due to the outbreak.
And the Central Bank of the Philippines also cut its benchmark interest rate by a quarter point to 3.75%. Fitch Solutions Macro Research said in a note that another cut is likely, noting that the outbreak “could affect external demand, domestic confidence and already softened metal and energy commodity prices, posing disinflationary and economic risks to the Philippines.”