Comment: Coronavirus and the impact of the unknown

clock • 2 min read

With every outbreak of a deadly virus, the global economy is dealing with the unknown. The scale of the pandemic and the economic damage it might cause remain unknown until the spread is contained. Chris Towner explains the background and the implications for the Asian economy.

At the time of writing, the novel strain of Coronavirus is far from contained. Today's death toll was the highest yet, with 97 reported and for those in the UK, things are now closer to home: the number of confirmed cases has doubled from 4 to 8. 

Nevertheless, there is a limited sense of panic in Europe. Previous (and more deadly) viruses such as SARS were contained eventually. However, despite the Coronavirus having a lower mortality rate than SARS, with less than 2.5% of infections leading to fatalities, it is certainly more infectious. 8,000 people contracted SARS globally, and so far, more than 40,000 people have been infected by the Coronavirus.

Today S&P lowered its forecast for Chinese GDP growth from 5.7% to 5% in 2020. By contrast, a decade ago the world expected China to grow by 10% every year."

As the spread of this contagion accelerates, so too does the economic damage. While the initial outbreak was during the Chinese Lunar New Year celebrations, and so had a limited impact on economic output, the question now is how quickly China will be able to resume full production. Today S&P lowered its forecast for Chinese GDP growth from 5.7% to 5% in 2020. By contrast, a decade ago the world expected China to grow by 10% every year.

The Coronavirus also impacts global currencies. The two safe haven currencies other than the US dollar are the Swiss franc and the Japanese yen. Given Japan's proximity to China, it can hardly be perceived as safe from a potential pandemic. Therefore, the Swiss franc, much to the annoyance of the Swiss authorities, has seen huge inflows.

On the other hand, the Australian dollar, probably the most sensitive currency to this crisis outside of China, has weakened. The Australian economy has become increasingly reliant in feeding rampant Chinese growth over the last ten years. Australia is still reeling from wildfire damage and now it must deal with Chinese economic growth slowing down.

With interest rates already set at historical lows of 0.75%, Australia is fast running out of road for further stimulus. Just like the presumed 10% GDP growth from China ten years ago, the Australian dollar used to be considered a high yielding commodity play. Now it looks set to join the ever-growing group of low interest rate currencies.

Chris Towner is a director at Chatham Financial, an independent financial risk management advisory and technology firm.

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