A recent strengthening in growth among developed-world nations may help offset some of the economic impact of the outbreak.
In light of the recent coronavirus outbreak centered in China, investors have lowered their expectations for global economic growth and industrial commodity demand. Moreover, since the extent of the infections caused by the new pathogen, and the duration and magnitude of the interruption to economic activity in China, are not yet known, the timing of the potential rebound in economic activity following the negative shock is also uncertain. Thus, demand for gold and other safe haven investments has risen.
One positive aspect in the current setting is that key economic activity indicators across a range of nations in the developed world had started to exceed expectations in recent weeks. Improvements in performance were registered in the United States, Euro Area, Japan, and Australia. Overall, developed economies went from falling short of expectations for key data releases by 1.7 standard deviations a month ago to exceeding them by 0.4 as of January 28.
Table 1. Performance of Key Global Economies Had Recently Started to Exceed Expectations Variance of reported economic data from consensus expectations (standard deviations), as measured by the J.P. Morgan Economic Activity Surprise Index
Source: J.P. Morgan. The J.P. Morgan Economic Activity Surprise Index captures shifts in growth perceptions for global economies by looking at the recent history of economic activity surprises from consensus estimates. EM=Emerging markets. EMEA=Europe, Middle East, and Africa. LATAM=Latin America.
The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. Past performance is not a reliable indicator or guarantee of future results.
Clearly, the positive impetus to the global economy, EM Asia in particular, deriving from improvements in China is poised to shift to a significant drag, in our view. But we believe the positive momentum going into the still-unfolding coronavirus outbreak should provide some resiliency to the downside as economies adjust to the prospective drop in global demand.
Indications that the U.S. economy is picking up following a dip to just 2% growth in the fourth quarter of 2019–the official preliminary estimate will be released by the U.S. Bureau of Economic Analysis on January 30—are of particular significance. Low jobless claims show that the U.S. labor market remains robust, underpinning near record-high consumer confidence. Since consumer confidence is a leading indicator, and U.S. consumer spending is slightly larger than Chinese GDP, this is a reassuring source of support for global demand.
Moreover, while China’s central bank and fiscal authorities are very likely to be formulating stimulus plans to support growth, in our view, the U.S. Federal Reserve could also supply additional stimulus, if it came to believe that risk emanating from a slowdown in China threatened to spill over to U.S. growth. Monetary policy flexibility in the United States is still two-sided because inflation expectations remain anchored below levels consistent with the Fed’s 2% inflation target. Thus, further easing, even with the U.S. unemployment rate at a very low 3.5%, remains an option. While combating the spread of this dread disease remains a challenge for governments around the world, we think it’s important for investors to remember that policymakers do have tools to blunt its impact.
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