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Too early to say whether Coronavirus will trigger a recession – UBS

Global stock markets recorded their worst week since the 2008 global financial crisis last week (Febuary 24 to 28) as concerns over the economic impact of the Coronavirus outbreak intensified.

From America’s Dow Jones Industrial Average to Japan’s Nikkei 225 and our own FTSE100, all of the major indexes closed last Friday having sustained enormous losses.

The global sell off cost roughly £3.8 trillion, with the FTSE 100 shedding £200 billion in value alone.

Investors are clearly worried that the spread of the Coronavirus, which at the time of writing is present in 77 countries having infected 92,311 people with 3137 fatalities, will trigger a global recession.

It is thought that the epidemic could have a negative impact on demand in China, where the virus originated, whilst also causing huge disruption to global supply chains.

Yesterday (March 2), the Organisation for Economic Cooperation and Development (OECD) warned that an escalation in the number of cases could half global economic growth to 1.5 per cent, which would send many national economies into recession.

The key question in light of this is how the UK economy is going to be affected. Will this be something that just impacts growth in the first quarter, or could the recovery be much more protracted than that? Or is it still too early to say?

An economist in the UK Investment Office of wealth management firm UBS, Dean Turner, thinks that whilst the true impact of the Covid-19 outbreak is still difficult to measure, it is certainly having a noticeable impact on the economy and will continue to do so.

He said: “The market sell off last week was clearly something that we haven’t seen for quite some time.

“We have already downgraded our forecasts in response to the initial outbreak. It is our expectation that growth will be weaker, but the open question is the duration of the hit to economic activity.

“Our sense is that if there are indications that the number of cases is going to peak by April or perhaps as we enter the summer, then there will be a hit to growth, but we’re not expecting to see a recession under that scenario.

“If it is something that is more drawn out and leads to a much bigger change in patterns of investment and consumption and you can start to see stress on the business sector, then the economic impact becomes much larger.”

Since last week’s historic lows, some stock markets have rallied after the world’s central bankers promised to take action to protect the economy. The Dow Jones for example, rose by almost 1300 points yesterday – the largest single-day increase in its history.

Today (March 3), the US Federal Reserve has taken emergency measures and cut US interest rates by 0.5 per cent. But concerns remain that monetary policy cannot solve this problem alone and markets still look volatile as we look to the week ahead.

For North East investors concerned about the decreasing value of their portfolios, it looks as if there will be further economic disruption but for how long, it is too early to say.

Dean and the team at UBS are encouraging investors to keep in mind their long-term objectives and act accordingly.

He added: “Our advice to clients is still very much to take a longer-term view on a 6 to 12-month horizon. We’re certainly not selling into the recent weakness; we’re looking for tactical opportunities.

“When you see a sell off at this speed and magnitude, it’s very difficult, even as analysts and strategists, to rationalise that because there’s so much going on behind the scenes.

“But clearly our sense is that, once the dust settles on this, there’s got to be some more rational analysis.

“We’re certainly not advising clients to sell out on the back of this news flow.”