Any notion of trying to estimate the future course of the global economy has become really academic. The Covid-19 virus has put the proverbial spoke in the global GDP wheel. It is not so much the virus’ medical impact, but rather the reaction to it by authorities to curb its spread that will impact economic activity. To put the virus into perspective, the Centers (It’s an American organisation) for Disease Control and Prevention (CDC) estimate that between 291,000 and 646,000 people die from seasonal influenza related respiratory illnesses each year. However, the economic impact of Covid-19 is impossible to calculate at the moment. First we have the short term impact. Wherever the virus strikes and spreads, there has been economic shut down. If people are kept indoors and not able to spend, there will be a knock-on effect through that economy.
It started in China and in the Wuhan area, which is a major industrial area in central China. Its shutdown will impact global growth, both from the perspective of economic activity and from demand in China. Nowadays China is the marginal swing producer of global GDP. Some estimates show global GDP growth falling to 1.8% in first quarter. To all extents and purposes that is a recession. The majority of economists think there will be a ‘V’ shaped bounce once the virus is under control. There is also a supply shock being created by the epicentre being in China. So many things are made in China, and with production lines honed to minimise inventories, this has knock-on effects across the globe. The severity of this shock will depend on how soon full production can resume. We have already heard from the likes of Apple that they have supply-chain problems, which will hit revenues.
The long term impact of the virus is also hard to calculate. The dependency of companies to production in China, which is already under review due to Trump, is likely to be re-assessed. This would have the effect of reversing the global integration of supply chains. Many economists think that inflation has been held down over the last two decades by globalisation and the integration of China into the world economy. Reversing that process could be inflationary. There is also the psychological reaction by humans that could impact economies. If for example they decide not to take the risk of travelling abroad in case they get the/a virus, this could impact economic activity especially in tourism. Any increase in anxiety could impact consumer spending.
Overall, markets were looking for a reason to correct. There could easily be a central bank induced bounce back. The US Federal Reserve, US’ central bank, has cut interest rates by 0.5%. Indeed the harder Central Banks respond, the more likely that economic activity could pick up later in the year and markets will anticipate that in advance. That is as long as the virus comes under some sort of control, which should happen as the Northern hemisphere enters spring.
On Monday 9th March markets took a further lurch downwards. Although fear due to Covid-19 has been affecting the markets, this last drop was due to the falling out of OPEC, more specifically Saudi Arabia and Russia falling out. Saudi Arabia had been trying to get OPEC and Russia to decease production to shore up prices, but had failed. So Saudi Arabia announced over the weekend it was going to increase production rather than decrease production. This resulted in the price of oil dropping sharply. In Late February it was just under $60 a barrel, after the 20% fall in price on Monday, it was down to $36/barrel. Many of the top indices in the world, like the FTSE100 have a big percentage in oil companies, which were hit hard by the Saudi announcement. These companies were already under pressure as demand was expected to fall due to Covid-19.
We have not made any alterations to our SRI or Ethical models. In the US, the world’s largest economy, mortgage rates which are linked to long dated bonds are at record lows. Couple this with a lower oil price, and there is already a big stimulus to demand as consumers will have more money in their hands. This is before governments start to provide money to shore up the economy against Covid-19. Don’t forget Trump has an election he’d like to win in November. We believe that in the next few weeks we are likely to see the bottom of the current falls, and we will look back later in the year to see it was a unique buying opportunity.