Coronavirus Impacts China, Global Growth Outlook

Investors faced turbulence in markets early this week on growing fears over the global economic impact of the coronavirus.

On Monday, European shares had their worst one-day loss since mid-2016, the Dow Jones Industrial Average fell more than 1,000 points for just the third time in its history and Toronto's main stock index slumped almost 300 points, or about 1.6 per cent.

Markets stabilized early on Tuesday, but returned to negative territory as the day progressed on reports the virus continued to spread.

Monday's market spiral followed weekend reports that more than 30 countries now have at least one case of the infection, while other countries such as South Korea, Japan and Italy saw significant spikes in new cases. Spread of the virus in China has slowed, but as Eric Lascelles, Chief Economist at RBC Global Asset Management, points out, businesses in the country have remained shuttered to a greater extent than first thought.

"Surveys suggest businesses continue to operate well below their normal capacity a full four weeks since the virus began to significantly impede economic activity. Even though we assume an incremental return to business over the coming weeks, it is hard to see Chinese 2020 GDP growth operating much above 5.0 per cent," Lascelles wrote in his latest MacroMemo update.

GAM economists previously expected China growth for this year to come in at 5.6 per cent. Without the effects of the virus, that estimate would have been even higher at 5.9 per cent. China's economy grew at 6.1 per cent in 2019.

RBC GAM economists are now forecasting global economic growth of "a meek" 2.9 per cent, down from their previous 3.3 per cent estimate, a 0.4 per cent hit to growth overall.

"A worst-case scenario would have COVID-19 (coronavirus disease 2019) ping-ponging around the world, forcing companies to shutter on a nearly worldwide basis. It is unlikely to be quite that extensive, but the next week will reveal much and containment is no easy task," Lascelles noted.

What specifically has the uncertainty meant for investments? As RBC GAM points out, these types of negative shocks almost always lead to weakness in risk assets — and equities are generally considered the riskiest of asset classes.

As for what lies ahead for investors, time will tell. "History shows that these types of events tend to be short-lived provided that they do not have a negative impact on the economy. However, the question at this point is the degree to which this virus can be contained and the resulting harm that these containment efforts are having on the broader economy," RBC GAM says.

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For a roundup of coronavirus coverage, plus timely reminders and tools that can help when markets are volatile, click here.