Is the coronavirus a black swan like no other?

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February 03 2020
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A coronavirus pandemic would be even more of a “black swan” than the global financial crisis as policymakers may be limited regarding their ability to remedy or offset the effects, a credit agency has suggested.

Is the coronavirus a black swan like no other

According to Moody’s Analytics, industrial metal price index has plunged in response to the possible spread of the virus.

Moody’s noted there is a strong correlation between world growth and metal prices, with prices holding up better during the worse month of the trade war than since the virus outbreak.

“As world economic growth slowed from 2018’s 3.6 per cent to 2019’s prospective 2.9 per cent, the annual percent change of the industrial metals price index switched direction from 2018’s 7.0 per cent increase to 2019’s 6.9 per cent contraction,” Moody’s said.

The QIC noted that the main economic impact the coronavirus will have is through lower retail spending as consumers stay at home and avoid shops, restaurants, entertainment venues and hotels, although online shopping might mitigate the impact.

The outbreak of SARS in 2003 provides some guide to the potential economic impact. Chinese real GDP growth fell by around 1.5 per cent to 2 per cent in Q2 2003 due to SARS, with retail sales growth temporarily falling by around 5 per cent.

However, Chinese growth quickly rebounded in subsequent quarters. Overall, growth in 2003 was likely around ¼ - ½ ppt lower in China due to SARS (although this is difficult to disentangle precisely from Iraq war and other impacts), the QIC also stated.

BetaShares chief economist David Bassanese believes investors are right to be cautious, given all the uncertainty around the virus.

“In terms of economic impact, the virus outbreak will especially hurt retail spending and tourism in the Asian region, especially in China. As a result, it should particularly hurt Asian equity markets and consumer and tourism-related stocks especially,” Mr Bassanese said.

Domestically, Mr Bassanese suggested the coronavirus could be devastating to the Australian economy due to the impact it will have on the tourism sector.

“The negative impact on Australia is especially ill timed, coming in the wake of recent bushfires and a substantial slowdown in private spending.”

“During the SARS outbreak in 2003, the number of monthly tourists from China declined by 80 per cent in the three months from February to May.”

“Today, tourism accounts for around 3 per cent of GDP, of which China accounts for around 20 per cent (or 0.6 per cent of GDP). So, broad calculations suggest a halving of Chinese tourism number over a quarter could directly knock off 0.3 per cent from quarterly GDP growth. We can add to that a negative impact on tourism from the recent bushfires,” Mr Bassanese explained.

“Of course, assuming the virus is contained within only a few months (as was the case with SARS in 2003), the negative impact on local economic growth should be short-lived, with tourism likely to rebound by the second half of the year.”

“But Australia faces difficult growth challenges over the next few months, which suggests the RBA will likely be forced to cut interest rates further, although probably not as early as next week,” Mr Bassanese concluded.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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