If you’ve been paying any attention to world news the past few months, you’ve no doubt heard about the coronavirus. Not only can it take a fatal toll on it’s growing list of victims, but its effects are starting to creep into the daily lives of the general population. Throughout Asia, we’re starting to see increased levels of quarantine, the cancellation of public gatherings like concerts or sporting events, and negative economic impacts.
With the fears of a global pandemic rapidly growing, so too does the apprehension of the markets Could the coronavirus be what finally triggers a worldwide recession? We’ve already seen the investors start to dump stocks and increase their holdings of more stable assets like gold. Will it continue?
China: Ground Zero
It’s where it all began. In Wuhan specifically, a metropolis of 11 million residents that also serves as the capital to the Hubei province. It’s now less of a bustling city and more of a ghost town thanks to the citywide quarantine in effect. Wi Xi, a Wuhan native currently in the UK for schooling, explained how the citizens “can’t walk, they can’t leave their own flat – it’s not a holiday, it’s like jail. They are unable to even open windows for fear that the virus will spread through the air.” Businesses are closed and manufacturing has stalled. Considering that China is the backbone of the global supply chain, it’s very bad news for companies all over the world.
As of mid-February, the death toll has risen to almost two thousand. Many, however, believe that the Chinese government has been hiding tens, if not hundreds of thousands of additional instances
Unfortunately, China’s containment efforts have so far been less than ideal. In fact, Chris Meekins, a lead analyst for Raymond James, recently compared their delayed response to that of the Soviet Union during the Chernobyl disaster. Meekins said that after conversations with government officials and other experts, the firm believes that “the worst is yet to come,” adding that the “market is still underappreciating the potential dangers.”
The coronavirus isn’t just impacting daily life in China, it’s starting to hurt the economy. It’s bad timing to say the least. The nation saw significantly slow growth during the second half of 2019, and overall the year marked the lowest gross domestic product (GDP) increase since 1990. Even before the outbreak, 2020 was already going to be a challenge thanks to China’s massive amount of bad debt.
Enodo Economics estimates that credit losses resulting from the virus will come out to around 20% of their gross domestic product (GDP). Some have likened the impact to that of SARS back in 2005. Diana Choyleva, the chief economist at Enodo Economics, argues that “So when we then estimate what the impact’s going to be like…I think it will be worse — we could easily get into a technical recession in China in the first half of this year.”
The financial worries are now creeping into the rest of Asia, with Tokyo, Hong Kong, and Sydney all experiencing downturns. In particular, investors were spooked by 52 new cases of the coronavirus in South Korea, reigniting worries that it’s continuing to spread in Asia. The fear is also hitting Europe and the United States as we speak. Even those that have traveled to China are being quarantined, and isolated cases are starting to pop up all over.
With China, we’re seeing that it’s already making a bad idea worse. If any other major players fall, there could be a significant domino effect that reverberates around the globe. So who else is most at risk?
Japan: All But Inevitable
While China’s slower growth is bad enough, it could be worse. Japan’s economy has actually been shrinking, falling 1.6% in Q4 of 2019. That’s the largest decline since 2014. The numbers were worse than expected, with some pain already being anticipated as a result of a nationwide sales tax increase and the destruction caused by Typhoon Hagibis.
Even before the outbreak, a recession seemed all but inevitable for Japan. The government took action in the form of a December stimulus package, worth around $120 billion, but the epidemic now looks likely to squash the slim hope there was of recovery.
Germany hasn’t been faring much better than Japan’s as of late. Similarly, the German economy flatlined at the end of 2019, right before the coronavirus outbreak. Even without the epidemic, 2020 was poised to be difficult. The final three months of the year saw zero growth after experts predicted a slight rise. Combine a weak manufacturing sector with the fact that Germany exports heavily to China, and you have a recipe for recession.
We’re talking about the world’s fourth-biggest economy and the largest in all of Europe, so the knock-on effects could be huge. The eurozone GDP has been seeing stagnant growth in general but seemed primed to turn a corner. That could all change now. Claus Vistesen, the chief economist at Pantheon Macroeconomics, says “the coronavirus now means that the first quarter could well be a write-off.”
Italy: Yet Again?
Italy has had its fair share of economic trouble throughout the 2010s. They’ve shown signs of rebounding though, with political stability currently at high levels, the implementation of a public investment plan, and reformed income taxes. Now with the coronavirus, they could suddenly be heading towards their fourth recession in a little over a decade.
Italy is a major destination for Chinese tourists, and the nation spends quite a bit on Italian automobiles and luxury goods. China is also Italy’s third-largest supplier, so the relationship goes both ways. As with Germany, an Italian collapse could send shockwaves throughout the rest of Europe.
The U.S. – The Big One
The world’s largest economy has kept chugging along, with only minor blips so far as a result of the coronavirus. Early February saw stocks enjoy a multi-week winning steak, but the end of the month brought them down to earth. This was led by Apple, who warned shareholders that it will fall short of future revenue forecasts. The reasons are something many companies may start experiencing very soon: not only are there production delays and parts shortages in China, but the stores that actually sell Apple products are keeping their doors closed in response to the epidemic.
Several of the key recessional signals are flashing red at the moment. The 30-year bond yield hit an all-time low and the yield curve is narrowing. The price of gold has seen some major increases as well, with investors flocking towards the asset that is considered the single safest and most stable hedge against an economic downturn. Late February saw the price smash through the $1,600 level and hit a 7-year high. It quickly rose to $1,650 at the time of writing, with $1,700 squarely in its sights. That could only be the beginning if the virus continues to spread, as many fear.
Gold prices have been rising, but it’s not too late to get in at what is still a relatively low level. Even if the coronavirus is eradicated, many of the world’s top economies are still inching closer and closer to an inevitable recession. By investing in gold, you’re not only protecting your portfolio from the volatility of the markets, but you’re setting it up for significant future growth, as well.
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