The coronavirus is the dominant factor in the value of financial assets in recent weeks. Unprecedented security measures to stop the spread of the epidemic in China have led to the restriction of the production activities of the largest multinational corporations. Amid falling consumer activity, domestic demand in the countries of the Asia-Pacific region also collapsed.
The uncertainty of the duration of the negative impact of the virus on the economies of countries and the extent of its growth leads to a surge in volatility in the financial markets, sometimes bordering on the stock market panic. The global economic community is beginning to search for the ghosts of an impending recession.
Let us evaluate the possible options for the impact of coronavirus on the macroeconomic indicators of the largest economies and consider the models of investors’ rational behavior.
At the end of last year, the International Monetary Fund (IMF) forecasted in the base case for 2020 an increase in nominal world GDP by 3.3% to $ 90.5 trillion. At the same time, naturally, the coronavirus factor was not present in the forecasts of macroeconomic indicators.
The uncertainty of the pandemic scale the moment is an objective obstacle to making a forecast. It is clear that the prospects estimated by the IMF at the end of 2019 will be unattainable, and economic growth will be significantly lower than the planned 3.3% per annum.
In 2019, the TOP 20 largest economies of the planet accounted for about 78% of the global economy. Thus, to assess the possible change in world GDP for all options for the impact of coronavirus on the global economy, we analyze the dynamics of the growth rates of national economies, taking into account their weight in the total GDP. We estimate the contribution of other countries based on global average quarterly GDP rates in annual terms. The diagram shows an example of the Trading Economics macro model in China.
Option I: V-Shaped Recovery
In the case of an early passage of the pandemic peak and a decrease in mortality rates, a gradual restoration of production activity against the backdrop of deferred demand will be observed. In order to meet the ever-increasing needs, production capacities will be loaded at a faster pace, and the “economic health” curve will return to the path of sustainable growth during the second quarter.
According to our calculations, when implementing this option, the average increase in changes in quarterly GDP of the TOP-20 countries of the world will be 1.95% on an annualized basis. Given the size of national economies, we obtain an annual GDP growth rate of 2.04%. The remaining economies will account for about 0.39% of global GDP.
Thus, in 2020 we can expect growth of the world economy at the level of 2.43%. The deviation from market expectations will be about 0.9 percentage points, which is equivalent to damage in the region of $ 800 billion.
In the case of the implementation of the “V-option”, the global stock market will have to lay the forthcoming improvement in macroeconomic parameters: find the bottom and begin recovery by the end of March.
Blue chips will be the most attractive in the eyes of big capital due to the high liquidity of these exchange-traded instruments.
Given the recent increased risks of developing countries, the maximum increase in value can be expected in stocks that underwent the largest sales in March. Discounting the value of resold assets on the basis of the limited scale of the influence of coronavirus on the financial and operating activities of companies can lead to a significant rise in issuers of medium and small capitalization.
Reducing risks will lead to the loss of the protective functions of “safe havens”: the yields on government securities of developed economies will begin to recover, the Japanese yen will weaken, gold will be corrected from 7-year highs.
Option II: “W-shaped recovery”
The expansion of coronavirus beyond the focus of infection and the acceleration of relative mortality rates led to the official recognition by the World Health Organization (WHO) of a global pandemic on March 11.
During the first decade of March, encouraging information was received about a steady decline in the relative and absolute rates of infection and mortality in China. As of March 13, the number of people recovered was close to 80% of the total number of infected, the mortality rate was 3.9%.
On the contrary, in continental Europe and in the United States there is a sharp jump in infection. The relative mortality rate in Italy soared to 6.6%. Closing US borders for EU citizens for 30 days, mass suspension of industrial enterprises and cancellation of public events in European countries will have a significant negative impact on consumer and industrial activity.
Thus, the recovery of the Asian economy in a situation of temporary closure of part of the EU and US markets will only lead to a rebound in global GDP. The time lag of infection and the introduction of measures to stop infection between regions of the world will lead to the formation of a W-shaped dynamics of GDP.
After the recovery of the GDP indicator from the low base of the 1st quarter, most likely, there will be a delayed negative effect of a drop in macroeconomic indicators of the Eurozone and, to a lesser extent, the USA. The growth of the II quarter will be replaced by a downward trend before the beginning of autumn, and a longer period of recovery in foreign trade activity is also acceptable.
To assess the impact of the “W option” pandemic, we will adjust the indicators of world GDP for the III quarter. Despite the resumption of production activity in China, the final results include negative dynamics in the Asia-Pacific region due to falling external demand for exported products and a limited recovery in the services sector (tourism, education).
Thus, we obtain rough results of the downward dynamics of the indicator of economic health. Our assumptions are based on the duration of the European incubation period, equivalent to Chinese. In case of expansion of the area of infection, the magnitude of GDP losses will increase.
As a result of the calculations, we received a decrease in the average annual change in GDP by 0.15 percentage points. up to 1.8% per annum. Thus, global GDP may drop to 2.26%, which is equivalent to a 30% decrease in the growth rate of the forecast value of the global GDP indicator from the IMF. Losses in monetary terms will approach $ 1 trillion.
The strategy of behavior in the financial market with such an outcome of events may imply the expectation of a rebound in risky instruments due to their extreme overselling taking into account the high risk of a repeated fall. From a technical point of view, the probability of a correctional wave in the region of 30% of the February maximums is considered, which implies a quotation rebound from current levels to 2800 p. according to the S&P 500 stock index. A more confident recovery may be delayed in the long term from 1 year.
In a situation of uncertainty in the extent of the spread of coronavirus and the duration of the impact of restrictive measures on production and consumer activity, forecast models are still probabilistic.
Based on the newly received information, the “W-option” should be considered as the basic scenario for the dynamics of world GDP.
Despite the passage of the coronavirus peak in China, in the case of low effectiveness of measures in the eurozone countries, this can lead to even greater deepening of the recession processes in the global economy. Chinese production facilities, in fact, may not be in demand for a long time without external demand. The domestic consumption of the Middle Kingdom is not enough to enter a positive recovery path.
The results of our estimates are quite closely correlated with the calculations of the global economic model of Oxford Economics, which provides for a decrease in world GDP by $ 0.4 trillion (0.5%) in the event of the influence of coronavirus, limited only to the Asian region. In a global pandemic, researchers expect a drop in the global figure by $ 1.1 trillion (1.3%).