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Wednesday, February 05, 2020 /06:30
PM / By WSTC Research / Header Image Credit: africacenter.org
The
world economy was taken aback by the outbreak of the coronavirus, a respiratory
illness that comes from animals. Some of other troubling viruses that come
from animals include ebola and flu. In this report, we try to understand the
implications of the coronavirus on the global economy and financial markets. We
also try to see how the spill-over effect of the coronavirus in China can shape
the market narrative in Nigeria.
As
of February 5, 2020, according to the China's National Health Commission, there
are about 24,324 confirmed infections, with the death toll at 490. Outside
China, there have been 203 confirmed cases across 25 different countries, with
top confirmed cases in Japan (33), Thailand (25), Singapore (21), South Korea
(15), Germany (12), United States (11), and Vietnam (10). A similar virus that
happened in the past was the Severe Acute Respiratory Syndrome (SARS) which started
in November 2002 and lasted for eight to nine months, killing 774 people. The
SARS disease spread across 29 countries. Just like the SARS disease, the
coronavirus is especially dangerous due to its contagion. The virus incubation
period could be up to two weeks before an infected individual shows symptoms,
which makes it very easy to spread the virus. Secondly, the air-borne nature
(cough, sneeze) of the disease also makes it very easy to contact.
Gravity
So
far, there are about 24,324 confirmed cases in China and about 409 patients
have died. Using the SARS outbreak as an insight to what to expect, according
to the World Health Organisation (WHO), there were 774 deaths recorded out of
about 8,000 reported global cases. By implication, the fatality rate was 9.6%.
Although each illness has its own unique components and considerations, the
coronavirus appears to be less severe than the SARS even though it might be
more contagious. The treatment of the coronavirus is deemed difficult, as there
is currently no proven cure in sight. This makes the disease deadlier and adds
to investor uncertainty.
Economic and Market Implications
The
direct impact of the coronavirus outbreak was felt on crude oil prices, which
had fallen by 15% to $55 per barrel since the announcement of the first death
of the coronavirus on January 11, 2020. The global stock markets also recorded
sell-offs of varying magnitude over concerns of threat to global economic
growth, induced by the coronavirus.
Earlier
during the year, global oil demand was projected to rise by 1.3mn barrels per
day while oil supply was projected to rise by 1.6mn barrels per day. Of the
1.3mn barrels per day increase in global oil demand, China was expected to
drive 39% of the growth. The 0.5mn barrels per day increased demand of oil
expected from China was on the back of demand of oil to power new petrochemical
plants in China. Also, the economic shift from an industrialising economy to a
more consumer and service-oriented economy was expected to drive the spur in
oil demand from China.
How the coronavirus hurts China and the crude oil market
The
spread of the coronavirus meant that the Chinese Lunar New Year holiday had to
be suspended. Also, travel restrictions were put in place. Factories, offices,
and shops remain shut with many multinationals temporarily closing factories.
By implication, this results in lower economic activities and consumption in
the Chinese economy. Already, the Chinese economy is reeling from the impact of
the trade war that had put pressures on the Chinese economy (GDP grew by 6.1%
in 2019 - slowest rate in three decades). With a lower consumption
anticipated for the Chinese economy and considering the significance of the
Chinese economy to the global economy, the world output growth faces a genuine
threat.
More
importantly, China is one of the largest importer of crude oil, with about 14%
of global demand coming from China. According to Bloomberg, the daily oil
demand from China has declined by 20% since the coronavirus outbreak. This
implies that the forecasted growth in demand of crude oil in world is not going
to materialise, given the current state of things. Specifically, it means that
one of the world’s biggest importer which typically consumes an average of 14mn
barrels per day needs a lot less to power machinery, and fuel vehicles. Hence,
this creates a supply gap in the market, and expectedly crude oil prices
crashed based on the forces of demand and supply.
Specifically,
we summarise the implications of the coronavirus on the financial markets:
Our view
We
note the risks posed by the coronavirus to global economic growth, emerging
markets economic growth, and the Nigerian economic growth. However, in our
view, we believe that based on the ongoing efforts made by the Chinese
authorities, the coronavirus could be contained much sooner. Nonetheless, we
expect that pressures in the global economy might exist in the first quarter of
2020, at least.
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