investment insights
Market update: oil disruptions add to covid-19 stress
Key takeaways
- Investors are grappling with growing uncertainty as the coronavirus spreads beyond China, with most countries still in an early stage of contagion. In addition, following last week’s inconclusive OPEC+ meeting, additional pressure is coming from the turmoil in oil markets, where both demand and supply outlook is changing substantially.
- Having initially only accounted for spillovers from China, we now lower our growth forecasts for all major economies more substantially, factoring-in domestic weakness from the outbreak.
- Our key assumption is that COVID-19, in a similar seasonal pattern to past epidemics, is contained in the spring, leading to a sharp recovery in H2 2020. But we note that there is significant uncertainty around the exact path of the epidemic and the potential success of containment measures taken by different countries, with some still in an early stage.
- We think it is paramount that policy responds, to prevent a sharp hit to confidence that could generate recession risks. We have seen some early signs of that, although the response is by no means comprehensive at a global level yet. Given the sharp market correction underway, more aggressive response by policymakers has now become much more likely.
- We maintain a balanced portfolio approach. While we choose to neither de-risk nor re-risk our portfolios at this point, we are closely monitoring both the evolving epidemic dynamics and the associated policy response to adjust our portfolio positioning accordingly - being conscious that in many countries, given the dynamics of the epidemic spread, news flow is likely to be negative for at least several more days.
Highlights
We continue to stress that an external shock of this nature should not typically result in a recession. An epidemic, like a natural disaster, can cause an abrupt downturn as activity shuts down, but the recovery can be just as sharp once the economy reopens. As February’s strong nonfarm payrolls in the US showed, the world economy was not particularly weak before the outbreak, nor vulnerable to a shock tipping it into recession. This is a key factor worth keeping in mind in assessing the path of the economy against the current backdrop.
However, even a transitory shock has the potential to trigger recessionary dynamics if it hits confidence so severely that domestic weakness becomes entrenched. This is where policy has a clear role in providing support that offsets some of the epidemic-driven weakness. While the typical monetary policy easing through rate cuts may be less effective, a mix of liquidity provision, fiscal stimulus and targeted measures to support particularly affected corporates and sectors, can offer a much- needed boost. While we do not expect a recession, the impact from the COVID-19 epidemic is likely to be substantial, at least in the near term.
China has been surprisingly successful in its initial containment efforts. Daily new increases in China’s confirmed infections have slowed to a trickle after imposing aggressive quarantine measures on key cities over the Lunar New Year holiday. This creates an opportunity for China to enter spring with better control of the disease. As long as the country can avoid a second wave of infections once internal travel restrictions ease, or from foreign outbreaks, it will likely see a sharp recovery in the middle of Q2.
We make larger revisions to our forecasts for other major economies. We expect significant impact on the euro area, where we forecast 2020 GDP growth to reach only 0.4% (from 0.8% previously), given the severity of the situation in Italy, the relatively limited room for policy response, and the large impact of external demand. In the US, we expect growth to be around 1.5% this year, from 1.8% previously, with the somewhat smaller impact explained by the lower reliance on external demand and the likelihood of more meaningful policy support. We also reduce our growth expectations for Japan, the UK and Switzerland.
Wichtige Hinweise.
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