10 February 2020
Coronavirus predicted to dent growth
2,500 years ago, Sun Tzu wrote:
“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”
The Art of War continues to be a staple of military academies around the world today. Indeed, China may see several enemies looming but, for now at least, the coronavirus is very much leading the charge.
Last week, state-run media published claims that a “major breakthrough” had been made in finding a cure for the virus, which has now spread to almost 30 countries and claimed 900 lives (and possibly many more – with some fatality figures only including cases admitted to hospital). Despite the media claims, the WHO said on Wednesday that “no known therapeutics” have been identified. Hopes of a possible lull in the death rate vanished on Thursday, and many Chinese factories remain closed to stem the virus’s spread.
Capital Economics commented on the impact of the virus on the global sphere:
“Our best guess is that the economic disruption related to the coronavirus will cost the world economy over $280 billion in the first quarter of this year. That would mean that global GDP will not grow in quarter-on-quarter terms for the first time since 2009. We assume the virus will be contained soon, and that lost output is made up in subsequent quarters, so that world GDP reaches the level it would have done had there been no outbreak by the middle of 2021.”
Longer-term, many experts are predicting the outbreak to have a worse impact on the global economy than the SARS epidemic of 2003, mainly due to the power China currently commands, having grown from the sixth-largest economy to the second over the time period.
That said, Beijing’s move to cut tariffs in half on $75billion of US goods as part of the phase-one trade deal did boost stocks last week. Oil was another beneficiary, as traders feared major quarantine policies could hit demand.
Traders also returned from their Chinese New Year breaks last week, and the Shanghai Composite rose gradually over the course of weekly trading. Data showed that the country’s services sector grew only slightly in January, but business expectations and credit growth both rose. Moreover, until the virus began its rampage, Hong Kong’s economy was finally showing signs of a muted recovery. New analysis by Morgan Stanley suggests that Beijing will offer at least as much fiscal stimulus in 2020 as it did in 2019.
It’s all about Washington
In the US, there are plenty of positive signs to be found in the economy. Manufacturing orders enjoyed a major boost in December thanks in part to military hardware orders from the Pentagon, and the percentage of S&P 500 sectors at record valuations is at 70%. Longstanding growth and plenty of Fed support has helped to buoy prices. Last Friday’s payrolls report offered a further positivity, as it showed that 225,000 jobs were added to the US economy in January – the unexpected boost lifted the dollar.
However, the developments that seem to be moving markets most in the US so far this year come not from New York but from Washington. Donald Trump’s impeachment charges were predictably knocked down in the Senate, where a two-thirds majority is required for them to progress.
Yet there are reasons to believe the impact of the impeachment charges is not yet over. For one, Mitt Romney, a senior Republican, voted in favour of impeachment. For another, the President faces a far bigger vote in November, when the country goes to the polls. Bernie Sanders has shot ahead to become odds-on favourite to win the Democrat nomination, overtaking the more moderate Joe Biden.
Brexit: So long, farewell…good riddance?
Closer to home, the UK’s parting from the EU was heralded by perhaps a rather fitting mistranslation. Irena Andrassy, Croatia’s permanent representative in Brussels, declared the EU’s last words to Sir Tim Barrow, the UK’s own representative: “Thank you, goodbye and good riddance”.
Chuckles aside, now the hard work begins. With the contentious Withdrawal Agreement now formally out the way, the Prime Minister has been keen to emphasise the need to diverge in key areas. George Osborne, former Chancellor and now a senior adviser at BlackRock, sees some sense in this approach, commenting:
“For financial services, it does not make sense to align completely with EU regulation – in some ways it makes more sense to diverge. The UK was the prominent voice for competitiveness in financial services in the EU parliament – this has now gone, and the EU may become less competitive as a result.”