The headlines in the United States have been describing the current situation in China related to the coronavirus outbreak. I have been asked by many of you as to what we expect the economic impact will be based on this growing health problem.
I was in China four weeks ago in Shanghai and the city was relatively normal. Shanghai Disneyland, shopping malls, concerts, all were operating normally. The large Shanghai Starbucks Reserve was busy and active.
Since I returned from China (after spending a few days gathering research on current conditions related to China and trade), things have changed dramatically. For the most part, public gatherings are pretty much all canceled or shut down. This is in Shanghai, which is still a great distance away from Wuhan, the epicenter of the virus outbreak.
In two weeks, the mood has changed dramatically. Chinese New Year which was scheduled to end this week has been extended by the Chinese government to at least next week which means industry and business activity is essentially ground to a halt. I was speaking yesterday with a contact in Qingdao (on the East Coast of China) and they mentioned the main concern for the population was where to get food supplies that they could be assured were safe. This is happening throughout China. This will undoubtedly have a significant impact on China GDP and economic growth. This could not have come at a worse time for China as the economy was already showing signs of slowing down.
China is roughly 25% of the global economy and connected economies add to this percentage. The meaningful slowdown in Asia will have an impact on overall global economic growth and will certainly have an impact on the US economy. We believe that low interest rates, low inflation, low unemployment, reasonable GDP, and the potential for solid earnings this quarter will likely outweigh fears about China’s current crisis. While there will be an impact, we do not see current conditions or expected outcomes to be so disruptive as to dramatically affect the US economy.
With that being said, expect volatility related to the headlines as infection ramps up around the world. Panic in Asia is just beginning.
So, what’s the bottom line on the China health crisis in terms of the economy? We believe it will:
- Minimally affect the US economy
- Increase market volatility
- Significantly impact Asia GDP growth
- Marginally affect the earnings of multinational companies in the United States
It’s a horrible health crisis and one that we hope is quickly brought under control. I've been out of China for over a month and fortunately I was away from the epicenter of the outbreak (so I am OK!). I do feel it is important to understand global economics and conduct on the ground research which we will continue to do. For the time being, we will be continuing to connect with our contacts around the world including China. As for China, I have no plans to go back in the near future until things calm down. Better safe than sorry.
Lastly, we are in the process of making portfolio adjustments given our 2020 Outlook on the economy and markets. Current headlines, including conditions in China, impact our portfolio positioning. We had already made adjustments last year in advance of this year but are continuing modifications in the first quarter.
If you have any questions about this information, please let us know. we are always here to answer your questions. Thank you!!!!