Trade and Economic Growth -- Coronavirus Questions

Updated: Feb 28, 2020

UPDATE 28 FEBRUARY 2020 -- As of today, the BCMstrategy, Inc. platform is tracking the global economic and financial regulation policy implications of the Coronavirus Update. We have also launched a #coronavirus channel on our open Slack workspace where we will share insights and daily platform data regarding global policy initiatives on this topic. If you are interested in tracking the economic policy reaction function regarding the coronavirus, please CONTACT US TODAY for an invitation to our free and open Slack channel.

As the number of cities in lockdown expands numerically and geographically, as deliveries from China spread fears of supply chain disruptions, and non-essential travel starts to drop, it is fair to question how much (not whether) the Coronavirus Outbreak will impact global growth projections for 2020. Even if mortality rates remain well below the garden-variety flu globally, shifts in tourism and conference attendance behavior could easily dent economies that rely on tourism to generate economic growth.

The Big Picture -- Aggregate Policy Activity

It should come as no surprise, then, that today's Momentum measurement shows trade policy regaining the top spot as the most active issue covered in our platform.

The composition of the action is similarly interesting. The spike in EU-related activity is mostly driven by Brexit activities (the negotiating mandate was formally approved yesterday) and related rhetoric. While Italy (perhaps predictably) pounced on the situation in Northern Italy to request budgetary flexibility, The most concrete activity taken by EU policy officials yesterday regarding the coronavirus outbreak in Europe was to request that Member States provide information on national efforts to detect and contain the virus. The day before, the EU pledged EUR232 million to help the World Health Organization and the Chinese government fight the disease.

But the majority of trade-related activity actually occurred in the United States, where different policy entities addressed different aspects of the virus outbreak.

Two particular moves in the United States merit attention:

China: The agriculture component of the Phase I trade deal was implemented yesterday, with agriculture sector tariffs and related Chinese import restrictions tumbling. As China bans domestic sales of exotic animal meats, an accelerated shift of domestic consumption patterns towards a more Western diet will require increased access to foreign produce and proteins. American farmers that struggled through last year's trade war will reap financial benefits (possibly also bolstering U.S. economic growth rates) while also knowing that they are helping a hard-hit population that is at the epicenter of the virus outbreak.

US Economic Growth: Yesterday's speech by Federal Reserve Vice Chairman Clarida (discovered on our platform this morning), makes clear that it is far too soon to say whether (or not) the economic fallout from the virus outbreak will dent existing economic growth rates. The implementation of the Phase I bilateral trade deal with China, while not specifically referenced in the speech, certainly bolsters that analysis.

What It Means -- Nowcasting

As noted above, tourism sectors will be particularly hard-hit in the near term. This is particularly the case for countries like Italy and Australia that receive a disproportionate amount of tourism revenue from Chinese travelers. Experience with SARS (which also originated in China, MERS, and Ebola to date indicate that the economic impact from decreased travel tends to be localized both geographically and sectorally.

The potential consequences for China ripple far beyond the human mortality toll. The nation's central role in global supply chains is at risk. From Australia to Europe to the United States, small businesses and their customers (not just large enterprises) face inconvenience and disruptions to their purchasing habits. If the disruptions persist through the first half of 2020, purchasing patterns will shift, with potentially significant implications for the web of global economic interdependencies that is already under stress.

Even if mortality rates remain low, the technologies that power The Distributed Age increasingly will provide companies and consumers of all sizes to shift their purchasing priorities to more local suppliers. Accelerated adoption of alternative manufacturing, delivery, and meeting mechanisms may power increased growth in those sectors while accelerating centrifugal forces that favor the local over the foreign.

The situation is a boon to technology evangelists. Supply chain disruptions could easily trigger increased or accelerated adoption of 3-D printing that would revitalize local manufacturing. Artificial intelligence analytical tools can accelerate production of potential vaccines and provide meaningful enhancements in understanding transmission rates and risks. As the full extent of the Chinese government's facial recognition and other technology monitoring mechanisms becomes more apparent, efforts by the G20 and the European Union to develop ethical standards for advanced technology use become more relevant....and more urgent.

If mortality rates meet or exceed those for the garden-variety flu, the disruptions will of course be more severe. In the United States, the Centers for Disease Control in Atlanta provides data suggesting that (fortunately), the hurdle rate is high as indicated by the infographic provided on their website today:

These data provide the baseline for measuring whether globalmacro analytics regarding the coronavirus outbreak imply a pandemic event.

In the interim, strategists and analysts attempting to assess the economic impact of the virus are better off focusing on the less dire but more strategically significant technical shifts in trade policy and purchasing pattern data.

Attention to these fundamentals now will provide opportunities to insulate portfolio exposures and spot alpha generation opportunities earlier by pivoting towards companies, sectors and countries that are best positioned to shift nimbly towards a more distributed supply chain globally as well as locally.

Substitution effects that accelerate reliance on virtual conferencing, 3-D printing at the industrial level, and information-sharing platforms like Slack will also generate increased pressure and attention on data privacy and data localization policies. But that is a topic for another day.


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