Does Coronavirus Pose A Long-Term Risk To The Global Economy?

Video Length: 00:09:18

On the latest edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Head of AIS Business Solutions Sophie Antal Gilbert discussed the latest coronavirus headlines, flash PMI (purchasing managers’ index) data for February and watchpoints for markets as the U.S. Democratic primary season heats up.

Potential impacts from the coronavirus outbreak on GDP

Markets slumped the week of Feb. 17 as the coronavirus outbreak spread beyond China, with global equities dropping roughly 1.5%, per the MSCI All Country World Index, as of midday Pacific time on Feb. 21. U.S. 10-year Treasury yields also fell approximately 10 basis points, hovering around 1.45% at noon Pacific on Feb. 21.

“The movement we’ve seen in equity and bond markets this week reflects growing concern over the potential economic impacts of the virus,” Eitelman said, explaining that while the number of cases appears to be plateauing, the virus’ spread beyond the Wuhan region of China has triggered additional worries.

First-quarter GDP (gross domestic product) in China is likely to be significantly impacted, he stated, noting that the country normally charts a GDP quarterly growth rate of roughly 6.5%. “China may see something like a 7% dent to GDP growth in the first quarter—which would spell a negative growth rate,” Eitelman remarked. The main reason why, he said, is simple: Many Chinese factories have been closed due to the ongoing outbreak.

“When factories are shut down, they’re not producing anything in the way of economic activity, which is precisely what GDP is trying to measure,” he explained. Eitelman added that in addition to China, the economies of Hong Kong, Taiwan and Singapore may also take a big hit—with lesser impacts expected in Europe. The U.S., he said, will probably only experience very minor economic impacts from the virus.

The bigger issue for markets going forward is the length of the duration of the outbreak, Eitelman said. “Historically, in past outbreaks where the virus was ultimately contained—such as SARS—there’s usually been one big quarterly hit to GDP, and then the economy has snapped back to normal fairly quickly,” he stated. Assuming this proves to be the case with coronavirus, financial markets should ultimately be able to look past this, Eitelman concluded.

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