On 31st December 2019, a pneumonia of unknown cause was detected in Wuhan, China and reported to the World Heath Organisation (WHO) country office. Less than 3 months later, more than 20,000 people have died and the virus continuing to spread (as at 26 March).
Without getting into the politics of the matter, it seems the only viable way to control the pandemic is self-isolation, a policy adopted in various forms by countries around the world. Estimates are that one third of the worlds population are currently in some form of lockdown.
I don’t need to tell you that the economy is going to suffer as a result.
As an investment professional, I’m really interested in 3 questions:
- When are we going to see the economic impacts of Coronavirus?
- How big will the impact be?
- When are we going to see the recovery?
I work with multi-billion dollar fund managers to help them navigate macroeconomic trends. I don’t pretend to have all the answers, but I do feel well placed to provide some insights into the questions above.
When are we going to see the economic impacts of Coronavirus?
It’s already started.
The following data originates from a proprietary econometric model that displays excellent predictive power spanning multiple countries and asset classes.
Let’s look at some examples. Firstly, here is a table of the 15 countries I track, ranking current economic Growth, best to worst:
To date, New Zealand seems to be doing pretty well. No surprises though about the country at the bottom of the list – China. Let’s take a closer look at the Chinese Growth index:
The red band signifies the period where the virus was first reported to the WHO on 31 Dec 2019. We’ve seen a significant drop off in Chinese Economic Growth since then. The trend leading up to the coronavirus outbreak wasn’t looking good either, making recovery all the more difficult.
Shutdowns are a pretty good way to drive a negative demand shock, so I’d expect to see some significant impacts on inflation too. Here are the country rankings for Inflation (best to worst):
Interestingly, China comes in at number 5. Bear in mind though, China isn’t exactly a glowing example of laissez faire economics. Given the spread of the virus in Italy, let’s take a closer look at the official inflation indices released since 31 Dec 2019:
The scores in the table above range of -100% to +100%. There has been a consistent decline in inflation data since early February.
How big will the impact be?
It’s too early to call. At this point, the infection rate continues to increase while Governments around the world introduce stimulus packages that may or may not alleviate some of the damage. I’ll be doing my best to quantify the full impact and gauge how effective any stimulus measures are in stemming the economic damage.
When are we going to see the recovery?
I’ll be posting frequent updates on this question as it’s probably the most pertinent of the three. Just bear in mind that markets are probably the best leading indicator we have at the moment.