The coronavirus outbreak—or Covid-19 —has caused significant market volatility over the past week. Our approach as always is to focus on economic fundamentals first, but the uncertainty around the scope of the outbreak has made it very difficult to assess potential impact. The situation clearly is unsettling for investors as more cases are reported across Europe and Asia, and the first case of community transmission has been reported in the United States. As this was written, the S&P 500 Index was 10% below its February 19 all-time high.
“The Covid-19 outbreak continues to significantly disrupt economic activity in China and throughout Asia,” said LPL Financial Senior Market Strategist Ryan Detrick. “Given that China is such a big component of many global supply chains, we will almost certainly see weaker economic data globally over the next several months.”
Even as the situation remains fluid and very uncertain, we want to provide some sense of the potential U.S. and global economic impact.
China: If virus containment holds in China, which is our base case, we could see something like a 3–4 percentage point impact to Chinese economic growth in the first quarter—possibly 2–3% gross domestic product (GDP) growth rather than 5–6%—followed by a much more modest hit in the second quarter. We think we would see a return to trend growth by the third quarter of 2020. This scenario would put China’s 2020 GDP growth below the current 5.6% Bloomberg-tracked consensus, shown in the LPL Chart of the Day, and the Chinese government’s previous 6% annual target. In other words, China’s GDP growth in 2020 could end up closer to 5% than 6%.
United States: At this point, our base case is that any economic disruption in the United States may be modest and short-lived, as we expect domestic efforts at containment to be more successful and have less economic disruption than in China. The outbreak may trim 0.25–0.5% from U.S. GDP over the next couple of months due to global supply chain disruption, falling export demand, and decreased tourism. If evidence emerges over the next month or so that the virus is being contained successfully, as we expect, the economic impact would likely be at the better end of that range (0.25%). In that scenario, damage to business and consumer confidence would be limited, setting the stage for a potential second-quarter rebound. We believe our 1.75% U.S. GDP growth forecast may still be achievable.
Global: In the short-term, the collective hits to global GDP from China, South Korea, Japan, and Italy—the countries where the outbreak impact has been greatest to date—may comprise 0.2–0.3% of global GDP. Our latest global GDP forecast of 3.5% from our Outlook 2020 publication is probably a bit too high in light of the latest news. We expect to update or reaffirm our economic forecasts once we have more clarity around Covid-19 impact in the weeks ahead.
We will continue to follow the news on Covid-19 closely and keep you updated on developments. Our hearts are with those affected. Look for more on this very fluid situation in our next Weekly Market Commentary on March 3.
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