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Economy | Asset Allocation

COVID-19: A Review of Global Economic Impact

  • Incoming data at the end of 2019 were favorable in supporting a modest upturn, with leading indicators of sentiment turning up. Whereas COVID-19 is only starting to appear in economic data, the human toll already is dramatic with disruption to human and business routine via quarantine, work closures and mobility limitations. There is uncertainty, not just about the epidemiological progress of the virus, but on how long and how much routines will be affected and spill over to the global economy. In recent days, COVID-19 has spread quite rapidly outside China, representing a substantial new challenge to the global economic outlook.


  • 2020’s quarterly pattern of growth is likely to feature a dramatic downturn in China in the early part of the year, which then percolates to weaken other economies. Citi analysts lower global growth forecasts by 0.2pp to 2.5% for 2020, nearly the weakest growth since the global financial crisis. The growth forecast for 2021 is raised by 0.1pp to 2.8%. China’s economic growth forecast is lowered by 0.5pp to 5.3% for 2020.


  • Assessment of the global economic transmission of the virus requires multiple lenses. China’s growth downgrade and disrupted consumer and business routines could spill over to other countries through 1) manufacturing supply chains; 2) tourism, transportation and services relationships; and 3) commodity demand and prices. The transmission of the Chinese economic slowdown to the rest of the world implies potentially more downgrades to global growth forecasts further ahead. The impact on uncertainty and sentiment from the virus will be crucial in determining the size of economic costs.


  • Some of the demand spillovers may loom large in the near term, but could rebound once routines are back to normal and growth resumes. For example, manufacturing supply chains are more likely to show a v-shaped recovery after the virus is brought under control. On the other hand, non-storable services such as tourism, education and transportation may be more impacted. Countries including Thailand and Singapore are already feeling the brunt, as is the logistics business in Hong Kong.


  • With visibility on the economic outlook reduced by the latest virus news, both positive and negative scenarios may play out in coming months, arguing for a more neutral asset allocation. Citi’s Global Investment Committee has recently reduced global equities allocation to neutral from overweight, and added allocations to US Treasuries and Gold due to their relatively more safe haven properties.