How the Coronavirus Outbreak Changes Our Views

Mike shares how we are updating views on global growth and asset allocation as the coronavirus spreads across the world.

The spread of the corona-virus beyond China has alarmed global financial markets, as it has opened up a new global dimension to the epidemic and potential for a sharp economic drag from efforts to contain it. We expect the economic expansion to remain intact, albeit on a lower track than we had previously anticipated. We see a sharp rebound once potential disruptions dissipate, yet the unknown depth and duration of the shock add material downside risks. As a result, we have pulled back our moderately pro-risk stance to a neutral stance.

Global markets have been gripped by fears over the impact of the epidemic. Market attention to the outbreak has shot up to levels higher than those seen during the SARS epidemic in 2003, according to our text analysis of broker reports and the financial press. See the chart above. We see the drag on economic activity threatening to push some developed economies – such as Japan and the euro area – toward the brink of a technical recession (defined as two consecutive quarters of economic contraction), even though we don’t foresee a recession in the U.S. or globally. A policy pause is no longer our base case. A sustained tightening of financial conditions or impairment to market liquidity could be met with coordinated policy easing by major central banks but many, such as in the euro area and Japan, have limited policy space. Fiscal policy will likely also be an important part of the toolkit, especially in China.

The level of economic activity is likely to step down for 2020 as the outbreak is becoming an increasingly global public health threat, we believe. Disruptions are already spreading across continents – and may further decelerate economic activity. We expect a rapid rebound in activity once disruptions dissipate, but still see a great deal of uncertainty around the extent and pace of the deceleration. These include the outbreak’s eventual geographical reach, the public health measures taken in response, and how long the outbreak and these measures last. One key signpost to watch in the near term: How successful will China’s effort to restart its economic activity be – and can it avoid another round of mass infection as workers return? This may provide insight on the potential duration of the outbreak – and its economic impact – elsewhere.