416-560-4318 | anil@akalinsurance.com anil.sharma@gmii.ca

In January this year, things were seeming to be prospective for the global economy with the projection by the International Monetary Fund (IMF) that there’ll be a growth rebound. But the coronavirus outbreak poses a serious threat to this revival in this growth, according to many.

Since the last week of February, global financial markets started to strongly react as the virus crossed the boundaries of China and spread to many other parts of the world like Europe and the Middle East. Since then, coronavirus risks have been heavily priced across different asset classes, which made some fearing a recession in the economy.

These days, many of the finance-related conversations are encompassing the discussion of whether this market draw down actually indicates a recession, what the true scenarios are for recovery and growth, and whether there’ll be any long-term impact from this unfolding crisis.

Consider the growth delayed instead of the economy derailed

These days, it’s becoming increasingly clear that the coronavirus is likely to hamper much more than the SARS outbreak in 2003 that infected over 8,000 people and killed around 750. The former hasn’t only caused more deaths than the latter but its economic consequences are more likely to be compounded by many unfavorable conditions. As the coronavirus outbreak disrupts economic activity, there’s reason to foresee a sharp slowdown in 2020 with growth significantly falling down.

corona virus

Additionally, as China is a major global supply-chain hub, disruptions happened there could undermine impact elsewhere. Commodity exporters like Latin America, the Middle East, Australia, etc, to whom China tends to be the largest customer, are likely to be impacted the most.

It’s true that the coronavirus has undermined our confidence in the projected sustainability of the economical upswing and has resulted in quarantining and shutdown of massive swathes of the economy. And thus, the short-term impact from the virus is quite significant as we’re downgrading the forecast for global growth.

Though financial markets are probably acting as though the coronavirus for the next couple of years, history suggests that these pandemics don’t last that long. While it’s true that this pandemic is going to affect a huge percentage of the world population and there might be something like a second or a third wave but we’ll surely find a way to fight it by that time.

In fact, it’s already being assumed that the coronavirus outbreak will be brought under control soon and by the end of the Q2, activity in China should recover to its pre-crisis level.

Since the last week of February, though recession’s mechanical models have ticked higher with safe assets’ valuations spiked sharply, a closer look reveals that we’re not on a path to recession.

First of all, the impact of the coronavirus hasn’t been uniform when it comes to valuations of risk assets. Credit spreads have gone up extremely little which means credit markets don’t yet foresee financing and funding problems. Also, though equity valuations recently have fallen dramatically, they’re still elevated compared to their longer-term history. Second, it’s important to note that though financial markets could indicate a recession, history suggests that recessions and bear markets shouldn’t be conflated automatically. The truth is, only out of three bear markets in the U.S. is non-recessionary.

There isn’t any doubt that now financial markets ascribe notable disruptive potential to the coronavirus but the fluctuations in asset valuations are also underlining the potential uncertainty encompassing this pandemic.

It’s true that there’s a crisis right now but when it’ll be over in the near future, global financial activity should recover relatively quickly with production levels returning to the pre-crisis state. Similarly, the lessening of the trade tension by the phase one trade deal between China and the U.S. should promote growth as uncertainty ebbs.

Whether the global economy can steer clear of derailment or not will depend on a diverse range of factors. These might include whether there’s any structural damage, whether the shock lasts or is a spike or the degree to which the demand will be foregone or delayed, etc.

What should be done?

If the coronavirus continues to spread, a contraction of the world economy isn’t impossible. However, no one should be dependent on projections based on the coronavirus outbreak as the financial markets are presently reflecting great uncertainty. Prepare for the worst and plan for the best trajectories and most importantly, begin to look past this crisis, which will more likely be a brighter future.

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Tax Strategies for Incorporated Professionals.

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