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Will Coronavirus trigger a global recession?

Morningstar healthcare analyst Karen Anderson looks at the likely impact of COVID19 on the global economy - and says the long-term affects may not be as bad as expected

Karen Andersen 23.03.2020
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Coronavirus

Although we project a grim set of scenarios in terms of fatalities in our analysis, our view on the economic impact is much more sanguine. Weighting our scenarios by probability, we forecast an average negative 0.2% long-term impact on World GDP due to the COVID-19 pandemic.

To be sure, we expect a much larger impact in the short term (with an average negative 1.5% impact on 2020 World GDP across our scenarios). However, equity valuations on average should be unscathed if our long-term projections on GDP are correct. Therefore, we think a 10%+ fall in global equities since the outbreak began is a gross overreaction.

In the short term, there are many channels through which a pandemic could negatively impact GDP. Below we list some of the channels categorised into "supply-side" and "demand-side." Supply side factors include those which affect the productive capacity of the economy (often referred to as "potential GDP"). Demand side factors are those which affect actual GDP without affecting the productive capacity of the economy.

Key supply-side factors: 

  • Labour supply would be curtailed by death, illness, quarantining, and preventative leaves of absence. This could come either from government restrictions (for example, mandatory quarantines), or from voluntary worker decision to avoid risk of infection
  • Businesses could close in at-risk industries to mitigate infection risk for employees and customers alike. Tourism, transportation, retail, and restaurants are possible examples

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About Author

Karen Andersen  Guest Author

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