News
Coronavirus: how to handle a supply shock?
Bruno Cavalier
Chief Economist at ODDO BHF
Based on Chinese health data, quarantine measures appear to be effective in curbing the spread of the coronavirus, but they are hindering all or part of the country’s economic activity. This is typically a negative supply shock. At the macroeconomic level, this type of shock is quite rare. Most recessions are caused by negative demand shocks following a fall in the purchasing power of income or the value of assets. Over the decades, economic policy has made progress in supporting demand when necessary (fiscal stimulus, lowering rates). But what can be done to support supply?
Uncertainty, a propagator of shocks
According to WHO daily reports, which compile data from national health authorities1, the spread of the coronavirus epidemic is slowing in China, but in recent days it has tended to accelerate in the rest of the world (chart lhs). China's drastic quarantine measures have limited the spread of the coronavirus. This is a very positive development from the health perspective. But these measures have also had the consequence of halting or severely curbing economic activity. In China, anecdotal evidence, for example on real estate transactions or vehicle sales, looks alarming. China’s entire economy has not ground to a standstill but given the number of lost working days and the delays in restarting, it would not be surprising if the quarterly growth rate in China fell by around 2%-points in Q12. Globally, the direct impact would be a loss of around 0.5%-points (see our monthly report Economy & Rates dated of 14 February 2020: "The recovery in quarantine"). These estimates are, needless to say, highly provisional and would be turned upside down if other countries were forced to halt all or part of their production base. This risk must now be taken seriously into account as over the last few days, the number of people who have contracted the coronavirus has surged in South Korea, Iran and Italy. The quarantine of 50,000 people in Italy at the weekend spooked the markets more than the same measure on 50 million Chinese citizens since the start of the epidemic. On top of the supply shock comes a confidence shock, at a time when economic uncertainty was already high (chart rhs). We examine what this means for the behaviour of economic agents and for reaction of policymakers.
1 https://www.who.int/emergencies/diseases/novel-coronavirus-2019/situation-reports/
2 In 2019, Chinese real GDP was increasing by around 1.5% per quarter (6% over a year). A loss of around 2 points would mean stagnation or a slight contraction in real GDP in Q1 2020. The pace of year-on-year growth would slow from 6% to 4%.
Disclaimer:
This publication is produced by ODDO BHF Corporates & Markets, a division of ODDO BHF SCA (“ODDO”), which is licensed by the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and regulated by the Autorité des Marchés Financiers (“AMF”).
This document, when distributed outside of the U.S., is intended exclusively for non-U.S. customers of ODDO and cannot be divulged to a third-party without prior written consent of ODDO. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document has been developed by our economists. It does not constitute a financial analysis and has not been developed in accordance with legal requirements designed to promote the independence of investment research. Accordingly, there are no prohibitions on personal dealing ahead of its dissemination. “Chinese walls” (information barriers) have been implemented to avert the unauthorized dissemination of confidential information and to prevent and manage situations of conflict of interest.
At the time of publication of this document, ODDO and/or one of its subsidiaries may have a conflict of interest with the issuer(s) mentioned. While all reasonable effort has been made to ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such. Past performances offer no guarantee as to future performances. All opinions expressed in the present document reflect the current context which is subject to change without notice. The statements, assumptions and forecasts contained in this document reflect the judgment of its author(s), unless otherwise specified, and do not reflect the judgment of any other person or of ODDO. This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this document is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice.
This document is for institutional investors only. It may not contain information necessary for others to make investment decisions. Consult your financial adviser or an investment professional if you are not an institutional investor.
Disclaimers for Distribution by ODDO BHF New York Corporation to United States Investors:
Please refer to the most recent research reports on the subject companies for complete information and relevant disclosures.
This document is produced by ODDO BHF Corporates & Markets, a division of ODDO BHF SCA ( “ODDO”). It is distributed to U.S. investors exclusively by ODDO BHF New York Corporation (“ONY”), MEMBER: FINRA/SIPC, and is intended exclusively for U.S. institutional customers of ONY and cannot be divulged to a third-party without prior written consent of ONY. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document is being furnished to you for informational purposes only and should not be relied upon as sufficient to form a basis for any investment decision.
At the time of publication of this document, ODDO, and/or one of its subsidiaries may have investment banking and other business relationships with any of the companies in this report. While all reasonable effort has been made to ensure that the information contained is not untrue or misleading at the time of publication, no representation is made as to its accuracy or completeness and it should not be relied upon as such. However, ODDO has no obligation to update or amend any information contained in this publication. Past performance offers no guarantee as to future performance. All opinions expressed in the present document reflect the current context which is subject to change without notice. This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of particular clients. Clients should consider whether any advice or recommendation in this document is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice.
This document is not a research report as defined in FINRA Rule 2241(a)(11) because the material in it is limited to one or more of the exclusions of the definition of research report in Rule 2241(a)(11)(A). This document is for institutional investors only. Consult your financial adviser or an investment professional if you are not sure you are an institutional investor.
Disclosures Required by United States Laws and Regulations:
Rule 15a-6 Disclosure: Under Rule 15a-6(a), any transactions conducted by ODDO, and/or one of its subsidiaries with U.S. persons in the securities described in this document must be effected through ONY.
Contact Information of firm distributing investment recommendations to U.S. investors: ODDO BHF New York Corporation, MEMBER: FINRA/SIPC, is a wholly owned subsidiary of ODDO BHF SCA; Philippe Bouclainville, President ([email protected]) 150 East 52nd Street New York, NY 10022 212-481-4002.
Statement of conflict of interests of all companies mentioned in this document may be consulted on Oddo & Cie’s research site .
Our news
Equities remain unmatched over the long term
Three British economists—Paul Marsh and Mike Staunton of the London Business School, and Elroy Dimson from Cambridge University—have embarked on a meticulous endeavour: they have traced 35 stock markets around the world as far back as possible to test a core theoretical question of investment. Are equities truly superior to all other asset classes over the long term?
The moment of truth for public debt
Economic crises leave a legacy of high public debt. Expansion phases should be used as an opportunity by governments to reduce their debt and rebuild some headroom in their public finances. This is easier said than done. Let’s look at what happened after the last two major crises.
The end of the American dream?
We must confess that we have a strategic "bias" in favor of the US market. The past 15 years proves us quite right. Since the end of the 2007-2008 Financial Crisis, Europe has outperformed for only 27 months, or just over 2 years. This structural outperformance of the US vs. Europe is mainly explained by a more robust EPS dynamic in the US.