The Four Coronavirus Scenarios: The Bad; The Worse; The Ugly; And The Unthinkable

Saturday, February 15, 2020
By Paul Martin

by Michael Every of Rabobank
Sat, 02/15/2020

The Covid-19 coronavirus could be more disruptive than markets are currently pricing in. Not in the least because the ‘true’ number of infected people remains uncertain, as the recent surge in cases exemplifies

We outline four scenarios in which the virus increasingly becomes severe: The Bad; The Worse; The Ugly; and The Unthinkable

We provide rough estimates for China’s growth trajectory in these scenarios although we stress that these are not our official forecasts since we are still working out the details

The three main channels through which Covid-19 will affect the global economy are tourism, net exports, and intermediate goods

In the ‘Bad’ scenario the virus outbreak does not last far beyond Q1. China’s GDP growth for 2020 could drop to below 5%, with production taking the biggest hit and a catch up in Q3 and Q4. This is our base case scenario, although with the recent surge in mind, the second scenario is becoming increasingly likely

In the ‘Worse’ scenario, the virus outbreak lasts beyond Q1. In that case China’s GDP growth could end up below 4% in 2020

In this scenario, next to China, Asia will bear the brunt of the prolonged outbreak due to its dependence on Chinas as an export market and intermediate imports as well as for tourism

In China itself, defaults of non-financial corporates in China could start to rise rapidly

This will lead to a decline in China’s long-term growth potential as private companies will suffer most, while less efficient SOEs will likely be bailed out. As a result, debt levels will balloon further, leaving China more vulnerable in the future

There will also be downwards pressure on the Chinese currency as extra CNY liquidity is made available

In the Ugly scenario, the virus spreads beyond China, and spreads to Asia as well as developed economies. Its effects will likely resemble the Global Financial Crisis of 2008/2009 more than the SARS outbreak in 2003

The Unthinkable scenario is a far left tail scenario, in which the virus mutates and becomes a truly global pandemic

Risk on?

The Rest…HERE

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