The coronavirus outbreak is dangerously close to shrinking global growth this quarter, UBS warns

bwinck@businessinsider.com (Ben Winck)
Volunteers in protective suits disinfecting a factory in China amid the coronavirus outbreak.

Reuters

  • The coronavirus outbreak's effect on the world economy is driving growth near negative levels in the first quarter of 2020, UBS economists wrote on Tuesday.
  • The hit to China's economy accounts for most of the bank's updated forecast, with disruptions in Thailand, Singapore, and Hong Kong also weighing on global expansion.
  • UBS's guidance doesn't take supply-chain slowdowns into account, and Apple recently warned that a hit to iPhone production would drive quarterly revenue below its initial estimate.
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The fallout from the coronavirus outbreak is already showing up in companies' guidance and market reactions. Now UBS economists expect the epidemic to drag global growth near negative levels in the first quarter.

Before the outbreak, the bank's "global now-cast" metric showed growth surging throughout Asia. But its latest reading projected a global growth increase of just 0.5% during the first three months of the year, down from the 3.5% level expected earlier in the quarter.

The virus' hit to China's economy accounts for most of UBS's lowered guidance, with disruptions in Hong Kong, Thailand, and Singapore also dragging the metric lower. Any growth level below zero reflects a contraction in the global economy, and consecutive quarters of contraction mark a global recession.

UBS's global growth forecast doesn't take supply-chain slowdowns into account, said a team led by Arend Kapteyn. Apple is among the latest firms to update their guidance on the virus' hit to manufacturing. The iPhone maker said on Tuesday that revenue for the quarter ending in March would fall below its initial estimate, citing a temporary hit to global phone supply. Apple shares fell as much as 3.2% on the news.

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UBS said it expected central banks to stay in a "wait-and-see mode," holding off on any stimulus as economic data reflecting the outbreak's fallout trickles in. The Federal Reserve is likely to hold its benchmark interest rate steady until inflation rises to its 2% goal. The European Central Bank "is largely on autopilot" while it focuses on a strategy review, the team wrote. Even Japan's central bank is expected to stay patient even though the nation saw a virus-related death on February 8, UBS said.

Though the bank's latest guidance reflects an ominous outlook for the world economy, containment of the virus would drive a sharp recovery. Delayed consumption and investment, along with economic stimulus, "should lead growth to snap back sharply ... similar to what one would see after a natural disaster," the team wrote on Tuesday. The net effect on annual growth is a less worrisome 0.2-percentage-point reduction, they added.

The death toll in the outbreak reached 1,875 people on Tuesday, with more than 73,000 people infected. Most of the infections are in China, though cases have been reported in at least 26 countries. Only five deaths have been reported outside mainland China, with single fatalities in Japan, Hong Kong, the Philippines, Taiwan, and France.

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