Until recently, it seemed markets were ignoring the potential impact of the Coronavirus. In a short space of time, the realisation that the virus has spread to the West has caused markets to correct significantly over the last few days. At times like this it is important to be humble and recognise that whilst we have access to lots of resources to assess the impact of the virus to the global economy and markets, there is large uncertainty with any view.
Our view is that the positive development that new cases of infection in China have been easing over the last week is offset by the slower than expected resumption of activity in China. So, it’s become more likely that activity doesn’t normalise by the end of March and we see a deeper than 10% contraction in the first quarter.
This could lead to some supply chain disruptions. Furthermore, the increasing spread of the disease outside of China is beginning to have a wider impact on activity. For example, school closures, event cancellations and travel restrictions to affected regions. There is great uncertainty around about how severe this outbreak will become and a growing risk of a global recession. However, the virus will eventually either be contained or run its course and we would expect little long-term damage to economic activity beyond the next few months. (Taken in Part from LGIM)