In Part One of our Coronavirus Series, we detailed the impact of the coronavirus (COVID-19) on office, retail and industrial tenants. Here in Part Two, we will provide an in-depth analysis on Coronavirus' impacts on the broader global business environment. The live dashboard above can be found here and is the most reliable way to track COVID-19 developments.
Around 80% of confirmed COVID-19 cases are in mainland China. Whilst comparisons are being made between the current epidemic and those of the past (e.g. SARS, MERS, Ebola), China’s powerhouse role in the global economy as a crucial link in worldwide supply chains is a relatively new phenomenon.
As shown in the graph below from Statistica, China’s share of global GDP has grown from circa 15% eight years ago to 20% today.
Furthermore, China’s exports (shown below) have significantly grown over the last 25 years. In a world more connected by trade than ever before, the impacts of COVID-19 will be more far-reaching and unpredictable than any prior global health scare.
China’s manufacturing data (PMI) for February was recently released. The PMI (shown below) fell to 40.3, the lowest since data collection began in April 2004. Economic output and employment fell the most on record with many factories and production plants in lockdown due to COVID-19. In contrast, Chinese business sentiment actually hit a five-year high, with expectations of fiscal and monetary economic stimulus.
Above all, the continuous investment cycle of panic-greed-panic-greed (etc.) has well and truly tipped towards panic. Below is a table of the top to bottom performance of the world’s major stock indices at the time of writing. Thus, the key Australian index (ASX200) has fallen -12.6% since 20 February.
Even though the impact of the virus will be more widespread than ever before due to the increased interconnectedness of the global economy, history tells us that it is not a good idea to sell your shares in times of panic.
The graph below reveals that one month after an epidemic has been declared, the average stock market performance is marginally positive (+0.44%), while 6 months after the declaration, average performance is very strong (+8.5%). Will COVID-19 be different? Perhaps- But it will pass nevertheless.
In times of crisis, governments and central banks stimulate the economy with large scale infrastructure projects, cash handouts and lower interest rates. Therefore, the expectation of economic stimulus has already lifted business sentiment in China.
The US Federal Reserve cut the benchmark interest rate by 0.5% to 1-1.25%. This was the first emergency rate cut and the largest single cut since the 2008 recession. Even though it will not help with global supply chain issues, the rate cut will stimulate spending through increased borrowing. There will be increased consumption and investment once supply chains and production levels return to normal. Hong Kong has already committed to giving $15.4 billion of cash handouts to its citizens.
The Reserve Bank (RBA) also followed the US lead and cut the cash rate by 0.25% to a record low 0.5% to stimulate economic activity. See the long-term cash rate trend below. The RBA also stated that they expect the coronavirus’ impact on education and tourism will cost the Australian economy up to 0.5%, pushing economic growth in the January-March quarter to negative. However, if the Australian economy contracts over this quarter and the April-June quarter, the country would suffer its first recession in 29 years. Further domestic economic stimulus is expected.
Tenant CS is an independent Asia-Pacific-based commercial tenant representation company. We help our tenant clients to source suitable premises and to negotiate the terms and conditions of their lease agreements.
We have offices in Singapore, Sydney and Melbourne, and are a part of a global network of tenant advisors, which thus means we can service clients all around the world! Contact one of our team members today to find out how we can help you.