More broadly, it would appear, markets (after a one-day plunge a week and a half ago) are taking their guidance from the SARS experience, where the epidemic had a sharp but modest impact on the global economy. It is estimated SARS shaved only between about $US40 billion and $US100 billion ($60 billion and $149 billion) off global GDP and was over within six months.
Most of the analysis of the latest epidemic sees the coronavirus shaving 10 to 20 basis points off global GDP this year, with the impact concentrated in this quarter ahead of a strong bounce back in the June quarter. Thus the economic effects of the virus are regarded as a temporary and fleeting.
Apart from the fact that the virus has yet to be contained that is probably an optimistic viewpoint.
As many have noted, in 2003 China represented only about 4 per cent of the global economy but today it constitutes more than 14 per cent.
It is also far more connected and central to global economic activity. It’s a massive market for other countries goods and services, the major global centre for manufactured products and a major intermediary in global supply chains and trade.
It’s also worth remembering that China’s economic fragility isn’t only due to the virus.
The trade war with the US and, even before that, its own attempts to deleverage and re-orient its economy towards consumption had slowed its growth rate to levels last seen nearly 30 years ago.
That makes the inevitable further slowing of the growth rate of the world’s second-largest economy – and by far the biggest contributor to global growth – of even greater significance than it might otherwise have been.
So, why are the markets so complacent?
They may not be. The US bond market is inverting again, with short term interest rates now higher than most longer term rates.
In the past inversions in the US bond market have presaged economic slowdowns, indeed recessions. In the current circumstances the inversion probably has to do with a flood of cash pouring into the market in a flight to the traditional safety of US Treasuries.
That, and a strengthening of the US dollar against America’s major trading partners as news of the virus emerged, would be consistent with a rise in anxiety levels among global investors.
The sharemarket might be benefitting from the same flight to safety but from investors willing to take apparently higher risks for greater returns.
With monetary policy settings in the US where they are, that perception of higher risk might not be the reality.
In the post-crisis era it has become apparent – and a conviction among equity investors – that central banks, while citing economic policy motivations for their actions, will do whatever it takes to avoid stresses in their financial markets.
The distinction between real economies and financial markets seems to have been blurred and the fundamentals of earnings and assets have become less relevant that the markets’ expectations of the central bankers’ next moves.
In a somewhat perverse development in this post-crisis period, those market expectations seem to have been factored into central bank decision-making. To avoid wealth-destroying market tantrums the central banks have generally delivered what the markets want.
The US Federal Reserve Board has already relaxed US monetary policy. It cut its benchmark rate three times last year after the sharemarket imploded late in 2008 as investors responded to the threat of more rate rises.
It is also reflating its balance sheet in response to last year’s seizure of the “repo” market.
If the coronavirus were seen as a threat to US growth, whether directly or indirectly through its impact on the global economy or both, the Fed will inevitably cut rates again and, if necessary, step up its purchases of Treasury bills and bonds in a full-scale quantitative easing program.
Other central banks, including the Reserve Bank, would have no option but to respond in kind to avoid a sharp appreciation in their currencies that would throttle their own growth.
Thus sharemarket investors would feel as though they have central bank insurance against a downside from the coronavirus that is greater than is generally anticipated.
All’s good in their world.
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.