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Coronavirus: The macro implications

23 March 2020

GAM Investments’ Michael Biggs considers some important questions on what could happen to the rate of coronavirus infections in Europe and the US and what it could mean for the global macro environment.

Daily Covid-19 infections increased sharply in in China in January, but peaked in mid-February and came down sharply thereafter. Unfortunately infections started to pick up in the rest of the world in late February, led by Italy and Iran. The question is what happens to infections from here, and what this means for global growth and asset prices.  

Chart 1: Daily new Covid-19 cases in Hubei versus Italy


Source: World Health Organisation and Johns Hopkins University as at 22 March 2020. For illustrative purposes only. 


Question 1: When will new infections peak in Italy?

Italy was one of the first countries outside China to experience a spike of infections, and it may be the first European country to see new infections peak. There is no reason why the experience in Italy should follow the Hubei experience precisely, because the policy responses might have differed. There is no evidence of a peak in infections yet; however, the country is in lockdown and, if infections follow the same path as they did in Hubei, we might see a peak in the next week.

Question 2: When will new infections peak in the rest of Europe and the US?

Countries such as Spain, Germany and France are perhaps a week behind Italy in terms of their infection rate trajectory, so infections could peak a week later. However, much depends on each country’s response to the crisis. 

Chart 2: Daily new Covid-19 cases in Italy versus Germany, France and Spain


Source: World Health Organisation and Johns Hopkins University as at 22 March 2020. For illustrative purposes only.

The UK and US were arguably a little slow to follow the European example, but policy changes are now happening quickly. The UK government announced that schools, cafes, pubs and restaurants would close from 20 March, as well as other places where the public congregate such as theatres, gyms and leisure centres. The UK is perhaps a week behind most of Europe, and new infections could peak in the middle of April. The numbers out of the US have proved less reliable so far, and the US might be a week behind the UK. While any of these are subject to considerable uncertainty, we hope that infections might peak in the US before the end of April.

Chart 3: New US Covid-19 cases


Source: World Health Organisation and Johns Hopkins University as at 22 March 2020. For illustrative purposes only.

Chart 4: New UK Covid-19 cases


Source: World Health Organisation and Johns Hopkins University as at 22 March 2020. For illustrative purposes only.

Question 3: What is the main infection risk from here?

While the peak in infections in Europe could always be reached later than we anticipate, in our view the major risk from here is whether there will be a second wave of infections, necessitating a second round of lockdowns. Some medical research seems to suggest this is likely and, should this transpire, we believe it would be very negative for the global growth outlook. We will watch the situation in China very closely; a recent increase in China ex-Hubei infections is a rising concern. Likewise we are following the numbers from Korea for the same reason.

The impact on growth

Question 4: How weak will Chinese growth be in Q1?

The Chinese industrial production numbers through February suggest that GDP growth could be down 25% quarter-on-quarter (QoQ) annualised. Normally industrial production is more volatile than the rest of the economy, but the virus has been just as damaging to activity in the services sector. Most sell-side banks are forecasting growth of around -30% QoQ annualised, and the risks around these estimates are larger than usual. 

The impact on annual growth is significant. Even if economic activity recovers back to where we originally expected by December 2020, growth for the year as a whole will be 5% lower than anticipated (+1% as opposed to +6%).

Chart 5: Chinese industrial production versus GDP


Source: Haver Analytics as at 29 February 2020. For illustrative purposes only.

Question 5: How fast will China recover in the absence of other shocks?

Consumption of coal, levels of congestion and property sales are still well down on normal levels, but have bounced back significantly since February. Without a second round of infections we think China’s recovery should be steep, and in this scenario we would anticipate the China purchasing managers’ index (PMI) to be back above 50 by May. The V-shaped rebound is evident in the Deutsche Bank growth forecasts – they expect growth of -32% QoQ annualised in Q1 to be followed by a rebound of +34% for Q2. While we do not think this fully takes into account the trade hit from weakness in the US and euro area, it does illustrate just how strong the rebound could be. For this to be possible, however, it is essential that infection rates do not pick up again as economic activity rebounds.

Question 6: How weak will global growth be in Q2? 

The challenge in making these forecasts is that infections outside China only started to pick up in earnest in late February, and the impact on the economy only really started being felt in the second week of March. The early signs, however, are not good. 

If the early survey numbers for March and the latest initial claims numbers are sustained through Q2, they point to growth of -4% to -5% QoQ annualised. The strong likelihood, of course, is that these numbers deteriorate further. Open table restaurant bookings are now down 90% globally. By our estimates restaurants generate around 2% of GDP in most developed countries. Even if restaurant visits only halve, this could reduce GDP by 1%. More recent forecasts by sell-side banks see US GDP down 13% to 23% annualised in Q2.

While this slowdown is extreme, the damage to asset prices from here will not be significant if it is short lived. While there may be some volatility as the weak numbers come in, asset prices might be able to look through one disastrous quarter if they expect a rebound in Q3. The two main risks, however, are 1) that infections start to increase again as activity recovers, and 2) that this initial shock causes a spate of bankruptcies that in turn leads to further weakness. 

Chart 6: Restaurant bookings

Source: Opentable as at 17 March 2020. For illustrative purposes only.

Policy and asset prices

Question 7: Can fiscal policy boost growth?

In our view, the initial shock to growth and the reduction in economic activity due to restrictions of movement cannot be reversed by a fiscal policy-led boost to demand. Governments have responded quickly, and the fiscal policy measures announced thus far have been large. The US has outlined a stimulus package worth around 5% of GDP, and credit guarantees of 10% and 15% respectively have been suggested in France and the UK. The British government has also said it will pay 80% of the wages of people not working due to the crisis, up to an amount of GBP 2500 per month.

However, the aim of these measures is not so much to boost growth in Q2, but rather to stop the initial shock from snowballing into something much larger. It cannot reverse the impact of limited movement; it can only help to keep the economy together until the infection rate allows mobility to increase. In the absence of these measures, many households and firms would find themselves in severe financial difficulty, and there may be fewer businesses left to recover when demand finally picks up. 

The economist Larry Summers has been quoted saying: “Economic time has stopped, but financial time has not.” The aim of the fiscal policy stimulus is to stop financial time as well. 

Question 8: What about the impact of monetary policy on asset prices?

In our view the appropriate way to think about the impact of monetary policy on asset prices here is in the context of the Gordon model. 

P = D/(r + erp – g)

Equity prices are P, where D are the dividends, r the risk free rate, erp the equity risk premium and g is dividend growth.

Monetary policy can lower r, and when it does the response in asset prices can be large. We have seen five days in March already where equities were up more than 4% on the day. However, on every other day, when central banks do not move, markets are focusing once again on g. The fluctuations in g and erp are far larger than the fluctuations in g, and until markets get some clarity on the growth outlook, it will be difficult for risky asset prices to settle.


In our view, it is difficult to buy risky assets until we have some visibility on future growth. If new infections in the rest of the world follow the path observed in China, then US infections could peak by the end of April. In that environment we would expect mobility restriction to be easing by June, and economic activity to be picking up strongly by July. Growth in China could be surprising positively before that. If we were certain of that outcome, we would view this as a buy opportunity.

However, we still face two large risks. The first is that developed market governments do not step in strongly and effectively enough to stop the initial shock from spilling over in to a more sustained contraction. On this point the early signs appear hopeful. Governments have moved quickly, and the steps they have announced have been large.

The bigger risk, in our view, is that we have a second round of infections once economic activity picks up again. From this perspective, we will be watching developments in China and Korea extremely closely. At this stage we remain cautiously positioned given these significant uncertainties. However, every day that new infections remain contained, the more visibility we gain on future growth, the more rosy the outlook for risky assets becomes in our view. 

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Source: GAM unless otherwise stated.
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