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Coronavirus Impacts Global Economic and Financial Data

| February 26, 2020
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Economists have been bracing for the impact of the Coronavirus. News stories about whole cities in China on lockdown, factories closed, and supply chain disruptions have been highlighting the risks that the virus poses. Now global economic data and company announcements are shedding more light on the negative impact that the virus may have on global economic activity, trade, and company earnings reports.

Kristalinea Geogieva, the head of the International Monetary Fund (IMF), recently highlighted the Coronavirus as a major risk to global economic activity and hinted that the IMF may reduce its estimate of global economic growth in anticipation of weaker growth in China and spillover effects around the globe.

The impact of the virus will likely be most evident in China, the epicenter for the outbreak. Many factories have been closed or are operating at reduced capacity in an effort to keep the virus from spreading. Economists estimate that China’s economic growth rate could be cut by half or more in the first quarter due to the disruptions. In addition, many Chinese companies that are still operating report that they are having difficulty making payroll due to disruptions in global trade.

Other economies with strong economic ties to China are also reporting weak growth. Japan, the world’s third largest economy, reported a 6.3% contraction in the fourth quarter due to reduced personal consumption following an increase in the sale tax rate. It is now projected that Japan will enter a recession as the impact of the Coronavirus may exacerbate an already weak economic outlook. Singapore has also shown signs of economic weakness causing the government to step in with increased spending in an attempt to offset or reduce the negative impact of weaker trade with China and other countries.

Multinational companies are also feeling the impact of the Coronavirus. Hundreds of large US companies have revised their revenue guidance for the first quarter 2020 downward citing the Coronavirus as a major contributor to their lower expectations. Most notably, Apple, Inc. recently updated their guidance saying that the impact of the Coronavirus on Chinese suppliers will make it unlikely that Apple will be able to meet their sales forecasts due to supply chain disruptions.

The financial markets largely shrugged off the negative Coronavirus news until this week. Increased concerns that the number of cases outside of China may continue to increase and that the overall global economic impact may be larger than previously expected led to a sharp decline in global stock prices, a decrease in interest rates,  and an increase in high-quality bond values.  US stocks in general fared better than foreign stocks during the selloff but losses were significant on all major exchanges.

Naturally, the magnitude of the selloff differed from company to company and industry to industry. Those companies and industries that are more exposed to international trade or tourism were hit harder in many cases. Meanwhile, companies and industries that are more dependent on domestic trade in the US sold off in sympathy with other sectors but the losses were much more muted.

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