Economy

How Global GDP Is Still Escaping Recession in the Covid-19 Outbreak

Jon C. Ogg

Published: February 19, 2020 1:45 pm

Investors, economists and the public all have two things in common at this point: finding out how to avoid the coronavirus and trying to figure out how and when the scare will end. The stock market indexes were higher on Wednesday after China reported the fewest number of new cases since late in January. China also has pledged to support businesses that are struggling due to the impact of Covid-19 on operations by helping them identify weaknesses in their supply chains.

While many reports have had with lowered forecasts for gross domestic product (GDP) readings in China and the rest of the world, it’s still too soon to be calling for a recession. China is going to have the biggest hit, and U.S. and Western companies with large factories and a large retail presence in China already have started to admit that their prior forecasts even two or three weeks ago are not (or may not) be reliable at this point.

24/7 Wall St. has collected many outlooks from semi-government entities and independent research reports from the private sector to outline the expected impact in 2020. The reality is that GDP will take a serious hit in China and the fallout will be felt elsewhere. That is the nature of this beast in a global economy. Still, all available data is not representing a recession.

Here are the latest economic and macro views that have been issued in the past 48 hours or so.

Kristalina Georgieva of the International Monetary Fund (IMF) had a blog post on the IMF titled “Finding Solid Footing for the Global Economy” in which she outlined some risks for the global and local economies. In January, the IMF offered its outlooks for global growth to rise from 2.9% in 2019 to 3.3% in 2020 and then to 3.4% in 2021.

Georgieva’s blog post noted that the global economy is far from solid ground, with uncertainty becoming the new normal. She directly pointed out the coronavirus as the top risk at the current time, and without making formal changes, it sure sounds as if the IMF is already lowering its bias on the global growth outlook. She said:

The coronavirus is our most pressing uncertainty: a global health emergency we did not anticipate in January. It is a stark reminder of how a fragile recovery could be threatened by unforeseen events. There are a number of scenarios, depending on how quickly the spread of the virus is contained. If the disruptions from the virus end quickly, we expect the Chinese economy to bounce back soon. The result would be a sharp drop in GDP growth in China in the first quarter of 2020, but only a small reduction for the entire year. Spillovers to other countries would remain relatively minor and short-lived, mostly through temporary supply chain disruptions, tourism, and travel restrictions.

Georgieva’s post pointed to the risks in China and potentially beyond:

However, a long-lasting and more severe outbreak would result in a sharper and more protracted growth slowdown in China. Its global impact would be amplified through more substantial supply chain disruptions and a more persistent drop in investor confidence, especially if the epidemic spreads beyond China.

IHS Markit had a post from late on Tuesday indicating that the novel coronavirus outbreak is currently the most significant black swan of 2020 (at least apart from the increased tensions between the United States and Iran) that could adversely affect China’s economy and the global economy as well.

IHS Markit outlined an expected impact to the first-quarter GDP report for China, while it sees a snapback in the second to third quarters of this year:

The impact of the coronavirus will mostly hit China’s first-quarter growth. It could extend the second quarter as well if the outbreak lasts longer (till May 2020 if the SARS scenario repeats itself). The overall impact is likely to lower the Chinese growth rate in 2020 to approximately 5%. Various economic research teams have already cut their forecasts for 2020 by 0.2 to 0.8 percentage points. … The Chinese economy is likely to bounce back after the new outbreak is contained with a rise in the activity in the Q2/Q3 of 2020 due to policy measures described above and the expected increase in consumption spending (with a significant increase in retail sales).

IHS Markit also noted that its PMI index for Chinese manufacturing for January 2020 was below the benchmark value of 50 points, indicating a contraction, but it also noted that this was less severe than the readout last year. Where things get dicey in the IHS Markit outlook is if the Covid-19 outbreak is not contained. In that case, global GDP growth could be lowered by 0.8 percentage point in the first quarter and 0.5 percentage point in the second quarter.

Charles Schwab noted that the copper and oil price action seemed to be pricing in a substantial hit to world GDP, but the firm believes that is unlikely and could lead to a rapid rebound. It posted its views on emerging markets on February 18:

Copper and oil seem to be pricing in a further slowdown by about 0.5% of world GDP, based on similar price moves in the past, which could cause stock prices to suffer. However, such a material slowdown in global GDP seems unlikely, unless the pace of infection climbs exponentially and spreads globally.

Credit Suisse published a view on earnings that is rather muted as to the real impact of the coronavirus, noting that it is not yet affecting earnings estimates:

As investors attempt to calibrate the impact of the Coronavirus, it is important to note that both first quarter 2020 and full-year 2020 estimates are running ahead of trend, with no visible sign that this health issue is impacting the outlook for profits.

Oxford Economics has updated its global outlook as well. It sees the rapid spread of the coronavirus hurting China’s growth sharply in the short term, and that also will cause global disruption. The group currently sees $1.1 trillion in global economic impact in 2020 under the global pandemic scenario. The optimism from just a month ago around the trade deal has been hit, and its report said:

In China, we expect the near-term impact to see first quarter growth plunge to just 3.8% y/y. Although growth should then rebound, it will take time for the loss in activity to be fully recovered and we have cut our 2020 China growth forecast by 0.6 percentage point to just 5.4%. … Global conditions should strengthen in the second half as the disruption fades. But we now project 2020 global growth will slow to just 2.3%, its weakest since 2009.

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On February 16, Moody’s revised its 2020 global GDP growth forecast downward to reflect the impact of the coronavirus in China. For China specifically, Moody’s cut its GDP growth forecast to 5.2% for 2020 from 5.8%, while maintaining its own 2021 growth forecast of 5.7%.

More to come. Maybe.