it is still very uncertain how the virus will spread in the coming months. At the moment there seems to be both positive and negative signs. While there are indications of stabilization in China, it is worrying that the virus now appears to be spreading rapidly in Italy, South Korea and Iran. Governments around the world are responding with tough measures to bring the spread under control.
Will the economic impact be so great that it has macro-economic consequences?
Yes, this is most likely inevitable. In contrast to most of the other types of risks and crises in recent years, the corona virus has direct economic consequences in a number of ways. This is especially true in China, where substantial parts of economic activity have been shut down and very large groups of people are unable to go to work.
It is therefore clear that GDP growth will be noticeably affected in the first quarter. After that, much of the recovery course will be shaped like a V, U, or L. A V shape means quick recovery, that is, the same as previous virus outbreaks.
In a U-shaped scenario, the uncertainty would persist for a longer period of time, but the recovery would be supported by a normalization of the situation, and a more expansionary fiscal policy would have an impact. The most unlikely scenario, an “L”, would result in a very long production downtime.
How big will the impact be?
It’s too early to say. The International Monetary Fund (IMF) has just published its preliminary forecast, in which China’s GDP growth has been revised downwards by 0.4 percentage points for the whole of 2020 and is expected to be 5.6 percent. At the same time, the IMF estimates that global growth will be dampened by 0.1 percent.
This is likely to be over-optimistic as the IMF predicts GDP will hit normal levels as early as the second quarter. Most likely, with a U-shaped scenario, we will see slightly bigger effects than this. We can shortly expect estimates from international organizations in which global growth will be dampened by around a quarter of a percentage point for the first quarter.
How can governments and central banks mitigate the impact? (h3)
First of all, it can be said that the authorities in many countries reacted quickly to minimize the risk of the virus spreading during the actual infection process. In addition, there are already political and economic measures, such as an interest rate cut in China and financial policy measures in several countries.
An important area will be ensuring that the sectors and companies hardest hit by the crisis receive help through loan support. The market is now increasingly taking the Fed’s rate cuts into account.
Such rate cuts would increase risk appetite across the global economy, but the situation would have to get significantly worse before the Fed acted. One should not underestimate other opposing forces that could mitigate the effects over time.
On the demand side, households will gain economic leeway for increased consumption in other areas if, for example, travel were restricted. At the same time, many manufacturing companies can accelerate growth over the remainder of the year to work off the overflowing order books.
Financial markets will soon focus on the growth numbers for 2021 as well, and unless we end up in a lengthy L-shaped scenario, it is reasonable to believe that production levels in 2021 will be only marginally affected by the corona virus. This means that the downward adjustments made for the whole of 2020 will mainly be offset by corresponding upward adjustments for 2021.
How are the stock markets and corporate earnings affected?
As mentioned earlier, although it is unclear how strong and how fast the recovery will be, the virus will affect global growth this year. This brings with it greater uncertainty about corporate earnings, which is never good news for stock market sentiment. Most analysts expect many companies to revise their earnings forecasts downward for the first quarter, and some companies have already indicated that it will. Here are some research reports from Qualified One.
Today China is responsible for a large number of raw materials and products largest Market in the world. At the same time, the country is often referred to as the world’s factory: products that are sold worldwide are made in China, and many companies rely on Chinese subcontractors for their production in other locations.
If large parts of the Chinese economy come to a standstill, as in the past few weeks, this will have severe effects on production and consumption, that is, on supply and demand. Apple, for example, is one of the companies that have already warned that both production and sales will be negatively impacted in the first quarter.
Why are the stock markets only falling now?
In the past few days, equity markets have rallied across the board despite worries. This is in part because most expected the effects of the virus to be relatively short-term and that growth and earnings would soon return to what had previously been quite positive trends, so the effects would be limited to the first quarter.
Both macro stats and company earnings reports for the fourth quarter also painted a fairly bright picture of the stock market. It’s important to remember, however, that these were based on data prior to the virus outbreak. Ultimately, investors expect the government and central banks to provide the support necessary for growth to mitigate the impact and avoid lasting effects.
How will the long-term effects affect the stock market?
Of course, that depends on how long it takes for the economic recovery to take off. Given our main scenario that the rebound will be V- or U-shaped (reverting to the previous growth trend), we expect the equity markets to eventually regain lost ground.
We must not forget that the extremely low interest rates lead to a significant shortage of alternatives to stocks. It may seem cynical, but in such a scenario, worry-induced downturns can represent buying opportunities. For now, however, before we know how the virus will spread to other countries besides Italy, and because of the risk of new declines in the near future, we are cautious about investing in stocks.
How should I act as a private investor?
It’s always a good idea to review your investments and make sure that you have good risk diversification and an optimal level of risky investments like stocks. The low interest rates and relatively favorable growth prospects that existed before the corona virus outbreak suggest that a long-term investor will continue to hold a normal stake in equity investments.