Full Economic Implications of Coronavirus Largely Unknown

As markets continue to assess the impact of coronavirus (COVID-19), the Templeton Global Macro team shares an update on the economic and market implications, which they say could be more detrimental—and last longer—than many observers previously thought.

New information on the coronavirus (COVID-19) continues to arrive daily; however, the peak magnitude of the epidemic and the full extent of the economic implications are still unknowable at this point.

Markets appear to be pricing-in a V-shaped recovery as the base case for the Chinese economy and global growth, though some concerns over the longevity of the economic impact have appeared to affect risk assets in recent days. There are signs that the duration and scope of the economic impacts will be greater for COVID-19 than they were for SARS (Severe Acute Respiratory Syndrome) in 2003.

Notably, China’s economy is massively larger today than it was in 2003—more than eight times the size.1 It is also substantially more integrated into the global economy and more extensively linked into global supply chains. Today, China represents 16% of global gross domestic product (GDP), up from 4% in 2003.2

Supply chains have already started to see the effects of factory shutdowns. Notably, Apple issued a revenue warning this week for its March quarter, due in part to specific factories being unable to open. Around 500 million3 people have been in a virtual lockdown across the country. Hubei province, the epicenter of the virus outbreak and an area under significant quarantine, is a key location for electronics and technology manufacturing.

Consumption and travel sectors within China and regionally continue to be significantly impaired. Additionally, commodity imports into China have been disrupted as factory shutdowns have halted the manufacturing sector’s demand for external resources, such as petroleum and metals.

Of additional concern is the fact that COVID-19 is far more prolific than SARS was, increasing the likelihood that it will persist for much longer. It is highly contagious and has long asymptomatic incubation periods of up to 14 days.

Carriers that don’t know they’re sick can spread the disease to others over the course of weeks. Additionally, a significant percentage of cases only show mild symptoms,4 such as a low-grade sore throat, which carriers may not recognize as COVID-19 and may not accordingly take actions to avoid spreading the virus.