As you are no doubt aware the Coronavirus or as it is now called Covid 19, has seen a significant rise in infection rates outside China. Over the weekend the sudden increase in infections reported in Northern Italy clearly highlighted that the virus has not been contained largely in Asia as hoped. Subsequently, an increase in infections in Spain, Austria, Croatia and southern Italy provide further evidence that the threat of Covid 19 remains very real.
The news of the recent outbreaks in Europe has dominated news media and appears to have dashed the hopes that we were beginning to get the infection rate under control. While the threat of infection posed by the virus is very real, the World Health Organisation (WHO) has remained more objective in its reporting on the spread of the virus. Despite events of the weekend, while the WHO has declared Covid 19 a global health emergency, they are yet to formally classify Covid 19 as a pandemic (the virus spreading largely out of control across multiple countries and regions) notwithstanding they remain extremely concerned that this outcome may eventuate.
So far this week equity markets across the globe have sold off and for most, the magnitude of the declines over the past couple of weeks has been between 5% and 10%, most of the declines occurring this week. The recent activity quite possibly in response to the sudden rise in infections in Europe.
While still recent the increase in infections in Europe highlights the risk of the virus spreading further disrupting communities, economies and business supply chains leading to a not insignificant slowing in economic activity and growth. The magnitude of this impact at this point is unknown but growth forecasts are being adjusted down and corporate reporting globally is highlighting expectations of reduced earnings due to the social and economic disruption caused by Covid 19.
The sectors that we expect to experience the brunt of the slowing are hospitality and leisure, education and related sectors and transportation particularly airlines. In addition, mining is also expected to see softening demand as global production slows. Australia remains somewhat vulnerable economically as circa 40% of our exports go to China, hence we think the negative impact in the short term at least is unavoidable. However, we do expect global governments and central banks to respond with expansionary and stimulatory policy to dampen economic effects of the virus though efforts now are more focused on containment. Ironically it is the containment which will result in the reduction in economic activity and the longer and more wide spread this is the greater the economic and social disruption will be.
We remain hopeful that Covid 19 is successfully contained in the foreseeable future but it is evident that this situation has quite a way to go before we are collectively confident in saying it is contained.