February 2020

In January we were looking at a relatively steady, if confusing, world. Two minefields, one financial and the other political, were evident, but a new and unexpected phenomenon has appeared in the form of Coronavirus.

Since the appearance of the Ebola virus and SARS, the World Health Organisation and national medical services have been energised and, to some extent, funded to deal with a global epidemic leading to a pandemic. The need for the pressure to deal with something that could become a massive problem is based on the fear of an infection that could be as lethal as the 1918/19 flu virus. This fear of a deadly virus that was transmittable by airborne droplets was natural, however the means of contagion was not applicable in the case of Ebola and only marginally so in the case of SARS. The current epidemic so far appears to be less dangerous than a bad winter flu outbreak, but just as contagious. One of the issues behind the transmission of an airborne virus is today’s massive population movement around the world, particularly by air. The current virus has got out of China and the spread is probably now uncontainable. The major question is really how dangerous it is and, as is often the case, will it become less lethal as it spreads?

The biggest issue to date is, however, the global economic impact. China today is core to the global supply chain of manufactured goods and base chemicals for medicines etc. The full ramification of the disruption to the Chinese economy has yet to be felt. The Chinese government reacted effectively to try and stem the spread, once the potential seriousness was understood. The reality, however, is that the spread will be inexorable and the draconian restrictions on travel are probably too late to stem the spread but will continue to have a growing impact on Chinese manufacturing. This creates a major problem for economic managers as the bureaucracy of the system, having implemented huge travel bans, will find it very difficult to take the decision to lift them. Indeed, getting China back to work probably can’t happen until the rate of contagion has dropped, statistically, dramatically.

From the Chinese economy point of view, this is very serious and, coming on top of the outbreak of swine flu which is still dramatically impacting food prices, creates a big problem for the government. President Xi’s political landgrab, making himself President For Life and Chairman of everything, constrains the ability of the authorities to act quickly on a regional basis. The Chinese Communist Party which has done so well in developing the economy is going to have its work cut out re-establishing its management credibility. The other issue lurking in the background for the presidency, is finding a solution to the political problems of Hong Kong. Here the economy is in a state of near collapse which will have an impact on China’s financial management.

So far, one is hearing little about the disruption of supply chains in Europe, where the economy is already faltering. The great German industrial machine already suffering from the disruption in the motor-car industry is making it more difficult for EU budgeting process to close the gap of some €60 to 75bn. left by Brexit. The effect of this shortfall on a total budget of some €1 tn. exacerbates the economic north/south divide and is going to be difficult to resolve. The impact of Brexit on Europe is far greater than Brussels is prepared to accept. The discussions leading up to the Brexit negotiations are being dragged into a far too public debate, particularly as the French government appears to be trying to divert public attention from its domestic problems by “being tough on the UK”. The current European posturing, while focussing on making the trade negotiations difficult, also ignores the fact that European capital markets are very dependent on the City of London.

The US seems to be in a sweet spot for the moment. It is still a number of weeks too early for the disruption in the Chinese supply chain to have a real impact and this probably won’t appear in the economic numbers until we get into the latter part of March or April. Trump’s economic skirmish with China last year has to some extent prepped the economy and started the process of disengaging American manufacturers from their dependence on the Chinese supply chain. With the speed at which US business management can move and the flexibility of American thinking in general, if the virus outbreak starts to wane in the near future one could easily see the US GDP accelerating rapidly in the latter part of the year, as it did towards the end of the SARS outbreak in 2003.

Damon de Laszlo

24th February 2020