Heading into 2020 the expectation was for global growth to accelerate. Growth would have received a much-needed boost from an improvement in the global manufacturing cycle, a reduction in the trade war and Brexit risks together with policy stimulus in China. Unfortunately, however, this was not the case. The world has been rocked by the outbreak of COVID-19, otherwise know as the coronavirus.

Markets have been sent into a spin and have been largely dictated by sentiment towards the containment of the virus. At this stage there is little to be sure of other than the fact that unless the virus is contained soon there will be serious repercussions felt globally. Not surprisingly data out of China has been abysmal. Although there has been a slight improvement in the last week or so, road congestion remains well below normal levels.

Property sales in Shanghai are around four times lower than usual, movie ticket sales are non-existent and daily coal consumption which tracks electricity consumption has fallen by 70%. See Figure 1. Initial estimates of the impact of the virus on growth suggested zero growth for China in Q1 of 2020 on a quarter-over-quarter basis (this suggests that growth in Q1 of 2020 would equal growth in Q4 of 2019). These estimates appear to be far too optimistic.

Estimating the economic impact of something like this is always challenging. Economists attempt to use similar past experiences to model their predictions. During the SARS epidemic in 2003, Chinese growth fell from 10.8% in Q1 to 5.5% in Q2 – a decline of 5.3%. Normal Chinese growth is between 5% and 6%. China accounts for 16% of global GDP versus 4% in 2003. On the basis then that Chinese growth falls by roughly 6%, we could see global growth drop by around 1% in Q1. This excludes the spillovers from weaker Chinese growth to the rest of the world. Global goods exports to China stand at around 2.5% of world GDP. Not only will Chinese goods imports drop but so too will service imports, mainly as a consequence of less Chinese tourists travelling abroad. When considering the spillover effect, mainly stemming from the global contraction in tourism together with other direct and indirect effects of

the outbreak, we could see global growth pushed down to zero on a quarter-over quarter basis in Q1. See Figure 2.

In our opinion the risk to global growth is tilted to the downside. Although there has been some containment, the outbreaks could reintensify over the next few weeks when more Chinese workers return to their jobs. The virus remains highly contagious, as illustrated with the case of the Diamond Princess cruise liner where 621 of the 3,011 passengers and crew onboard were infected. The World Health Organization has estimated R0 (the average number of people someone with the COVID19 virus will infect) to be between 1.4 and 2.5. A recent survey of 12 studies found a larger mean R0 of 3.28. A R0 above one would produce an exponential increase in the number of cases. The above raises the possibility that we could end up with a pandemic similar to the H1N1 (swine flu) virus where it was estimated that between 700 million and 1.4 billion people were infected. When looking at the fatality rate of H1N1 versus SARS, the latter resulted in deaths of between 5% – 10% while the former 0.01% to 0.08%. Preliminary studies have estimated that the fatality rate of COVID-19 is significantly higher than H1N1 but also lower than SARS.

If we were to assume, based on past events, that COVID-19 infects a billion people, with a fatality rate of 2%, it would translate into 20 million deaths worldwide. A pandemic of this nature would cripple the world economy leading to a recession as severe as the one experienced in 2008/09. Demand for most items other than necessities would collapse and the global supply chain would seize up. One consolation is that the recession would likely be followed by a vigorous “V-shaped” recovery. “U-shaped” recoveries tend to occur when there are many imbalances needing to be worked off. As we mentioned previously, emerging market and other riskier currencies would by now be benefiting from firmer global growth, and as such we would see a weaker Dollar (we saw this trend begin to emerge towards the end of 2019 and at the start on 2020). However, when shock events occur, people are drawn into safe-haven currencies, the Dollar being one of the favorites. The currency markets are being driven by sentiment rather than any other metric at present. This trend of a firmer Dollar against its peers is likely to continue until such a time that the COVID-19 virus is brought under control.