Economic and Financial Market Update: Coronavirus

Coronavirus Update

With the Coronavirus spread globally we have moved on from this purely being a Chinese story. How big an issue it becomes depends upon governments’ responses. Governments could decide that it is no longer possible to stop the spread of the virus and concentrate on treatment. This scenario will see less immediate disruption to economic activity. It could also mean more people get sick.

Another possibility is that there is a rolling series of quarantines around the world as governments do attempt to limit the spread. This scenario would see localised economic slowdowns during the period of the quarantine and an extended period of sub-par global economic growth in 2020.

A more extreme (and far less likely) possibility is that in an attempt to minimise the spread of the virus Governments’ stop all movement of people and goods between countries until the virus is under control (or an antidote becomes available).

So the medium term economic (and financial market) impact depends upon the severity and spread of the virus, how long the quarantining takes place and the ability of firms and consumers to weather the slowing of cash flows. Fear of the virus could see less people travel on public transport, go to the shops and even attend sporting events!

The most likely outcome is that the economic fallout will be short, but potentially sharp. Governments are aware of the economic cost of ongoing stringent quarantining. In fact, on 3 March the RBA “announced an emergency rate cut of 0.25 of a percentage point to a new record low of just 0.50 of a percentage point, in an effort to ease the economic fallout of the coronavirus.” 

The year started with some justifiable optimism. But then came the advent of CO-VID 19. A short term negative economic impact is certain. How big an impact, and for how long, are the unknowns. A more expansive Government budget would provide more reason for optimism.