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2020’S BLACK SWAN: CORONAVIRUS
ISSUE 86 | February 28, 2020 | 5:10 PM ESTEquityResearchGlobal Macro Research
Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.
The Goldman Sachs Group, Inc.
Amid many concerns heading into 2020, the event that no one expected was the outbreak of COVID-19—a coronavirus that first emerged in the populous city of Wuhan, China, and which is now proving to be both more infectious and virulent than the common flu. As China attempts to restart its economy after an unprecedented lockdown, the virus continues to spread globally, and data on the sizeable economic fallout starts to trickle in, coronavirus is Top of Mind. We feature expert interviews with Harvard’s Dr. Barry Bloom and University of Minnesota’s Dr. Michael Osterholm to better understand what we know—and don’t know—about the virus today. We assess the potential hit to global growth, which we now expect
will be -5pp and -2pp qoq ann. in Q1 and Q2, respectively—enough to prompt the Fed to cut 75bp by June, in our view. And we discuss where markets that have already been pummeled—albeit from lofty levels—go from here. Finally, CSIS’s Jude Blanchette gives his take on what this all could mean for China over the near and longer term.
While the case-fatality rate is much lower, the transmission is quite dynamic, and many more people will get it. So comparing this illness with SARS or MERS is not helpful.
- Dr. Michael Osterholm
“The sense is that this infection will probably spread worldwide...stringent control measures...won’t stop an epidemic, but they will slow it down and ultimately reduce the total number of cases.
- Dr. Barry Bloom
“
INTERVIEWS WITH:
Dr. Barry Bloom, Professor of Public Health, Harvard School of Public Health
Dr. Michael Osterholm, Director of Center for Infectious Disease Research and Policy, University of Minnesota
Jude Blanchette, Freeman Chair in China Studies, CSIS
Andrew Tilton, Chief Asia-Pacific Economist, Goldman Sachs
A VIRAL GLOBAL SLOWDOWN Jan Hatzius and Daan Struyven, GS Economics Research
MARKETS: BRACING FOR MORE UNCERTAINTY Zach Pandl and David Kostin, GS Markets/Portfolio Strategy Research
THE PHYSICAL REALITIES OF DISRUPTION Jeff Currie, GS Commodities Research
Q&A ON ASIA EQUITY IMPLICATIONS Tim Moe, GS Chief Asia Equity Strategist
WHAT’S INSIDE
of
Allison Nathan | allison.nathan@gs.com
...AND MORE
I think climbing out of this hole will likely stress the [Chinese] leadership in a way that it hasn’t been stressed since the 1989-1991 period.
- Jude Blanchette
TOP MIND
Jenny Grimberg | jenny.grimberg@gs.com Gabriel Lipton Galbraith | gabe.liptongalbraith@gs.com
Note: The following is a redacted version of the original report published February 28, 2020 [25 pgs].
0
3
6
9
12
15
18
Affected Now Affected in Q1 AffectedSometime Later
Never Affected
Korean Autos Korean Autos
Japanese Autos
European Autos
Korean Autos
European Autos
Japanese Autos
Apparel Apparel
Hardline Retail
Biopharmacy
Dental, Genetics, Animal Health
Homebuilders
Healthcare
-4
-3
-2
-1
0
1
2
Q4 2020Q1 Q2 Q3 Q4
Others (Public Demand etc)
Consumption Spending
Imports
Exports
Virus Contribution to GDP Growth
2019Q4
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Goods Services Goods Services Goods Services
Euro area UK US
Travel services
200
300
400
500
600
700
800
900
-10 -7 -4 -1 2 5 8 11 14 17 20 23 26 29 32 35
2017
2018
2019
2020
Days before/after Chinese New Year (Day 0=First day of CNY)
Feb 26th 2020
High-frequency proxies for China activity still depressed 2020 activity relative to 2019 activity, percent
1
1
We use past pandemics to estimate the potential growth
impact of global community spread Real GDP growth minus average growth over year before outbreak, pp
Baseline scenario: global growth remains weak in Q2 but stops
short of full recession Baseline scenario: impact of COVID-19 on 2020 ann. global growth, pp
0
20
40
60
80
100
120
140
-15 -12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30
Coal Consumption/Transportation
Property Transaction Volume (7dma)
Construction Machine Operating Rates
Number of Passengers Carried
Unweighted Average of Activity Measures
Days Relative to Start of Chinese New Year
-25
-20
-15
-10
-5
0
5
10
15
20
25
0 1 2 3
SARS China (2003) SARS Canada (2003)
SARS Hong Kong (2003) MERS South Korea (2015)
Avian Flu US (1957) Average
Quarters Since Outbreak
Q1 Q2 Q3 Q4
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12Direct China GDP Growth
World Ex China - Travel by Chinese Residents
World Ex China - Goods Exports to China
World Ex China - Direct Effect Widespread Transmission
World Ex China - China Supply Chains
Total
Upside scenario: the global economy quickly recovers in Q2 Upside scenario: impact of COVID-19 on 2020 ann. global growth, pp
Downside scenario, the Q1 hit deepens in Q2 Downside scenario: impact of COVID-19 on 2020 ann. global growth, pp
Q1 Q2 Q3 Q4
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
Direct China GDP Growth
World Ex China - Travel by Chinese Residents
World Ex China - Goods Exports to China
Total
Q1 Q2 Q3 Q4
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12Direct China GDP Growth
World Ex China - Travel by Chinese Residents
World Ex China - Goods Exports to China and Rest of World
World Ex China - Direct Effect Widespread Transmission
World Ex China - China and Rest of World Supply Chains
Total
US 10-year Treasuries reach all-time lows US 10-year Treasury yield, %
Market growth expectations: worried, but less than recently Cross-asset growth factor, index
0
2
4
6
8
10
12
14
16
18
1945 1953 1961 1970 1978 1986 1995 2003 2011 2020
Coronavirus fears drive 10-year US Treasuries to all-time lows
1945: 1.7%
1970: 7.8%
1981: 15.8%
2008: 2.3%
2003: 3.4%
1993: 5.5%
10
30
50
70
90
110
130
150
170
190
210
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Higher growth expectations
Commodity markets caught between rising surplus and
stronger stimulus Chinese special purp. issuance (rhs), RMB bn; steel inventories, kbd (lhs)
0
100
200
300
400
500
600
700
10000
15000
20000
25000
30000
35000
40000
Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20
Chinese govt. specialpurpose issuance (rhs)
Steel inventories (lhs)
size of temporary global GDP hit from viral outbreak compared to the disruption from a major US hurricane25x
“missing working hours” if all Chinese firms had restarted on the 1st allowable day—the equivalent of all US workers taking an unplanned break for two months
40billion
the population of Hubei, the province where the virus outbreak began, similar to the total number of people living in Spain and Portugal
60million
of annual global GDP is generated by China’s travel spending, double the amount of the US
0.30 -0.35%
2,000 Starbucks locations that have temporarily closed in China
240,000 global flights cancelled between January 23 and February 18
60 countries with confirmed cases of COVID-19
11towns, representing 50,000 people, under quarantine in Italy, the country currently most affected by the viral outbreak outside of Asia
Disclosure Appendix
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