COUNTING THE COST OF CORONAVIRUS
Your financial guide to the outbreak – Louise McBride,
THE coronavirus — from which more than 3,000 people have so far died across the world — would hit all areas of the Irish economy if it becomes a pandemic, an expert in the Economic and Social Research Institute (ESRI) has warned. “If you get to a situation where you see a dramatic reduction in the amount of travel between jurisdictions, either within Europe or between Europe and the US, that will have an adverse impact on economic activity in Europe,” said Dr Kieran McQuinn, research professor with ESRI.
“If the coronavirus outbreak continues, it’s likely to have very significant global implications.”
Any global economic slowdown would hit Ireland hard.
“Given the open nature of the Irish economy, Ireland is very vulnerable to extreme shocks and the outbreak of the coronavirus is an obvious shock as it has come from nowhere,” said McQuinn.
“The coronavirus could damage consumer and business sentiment here. That would impact consumer behaviour and spending, as well as investment by corporations and businesses here.
“Trade is the other big thing likely to be impacted if there’s a dramatic fall-off in travel between countries. Ultimately, if the virus reaches pandemic levels, it would impact the [Irish] economy across all levels.”
The World Health Organisation (WHO) has not declared the coronavirus, known as Covid-19, a pandemic. However, the recent acceleration of the virus in northern Italy and other countries has sparked concern it could reach pandemic levels and also trigger a global recession.
Should the outbreak of the virus last for another couple of months “this is enough to shock and slow the [global] economy temporarily — but not see it enter into recession”, said Will Sparks, financial planner with Sparks Wealth. “However, should the virus persist past the summer, this will certainly cause a technical recession [two consecutive threemonth periods of negative economic growth].”
Even if there isn’t a global recession, many countries are likely to experience an economic downturn this year as a result of the virus.
“Governments are expending considerable efforts to curb the spread of the coronavirus, but they have not yet been successful in fully containing it,” said Thomas Torgerson, co-head of sovereign ratings at the global credit rating agency DBRS Morningstar. “Every day there are new cases cropping up in unexpected places. Several major economies will experience a material slowdown in 2020 as a result.”
So what could all of this mean for your pocket?
DAY-TO-DAY FINANCES
Most of us still remember the job losses, pay cuts, debt problems and other financial miseries which the last recession brought to Ireland.
Similar problems are likely to be experienced here if the coronavirus triggers a prolonged recession, though a virus-related economic downturn is likely to look very different to the recession which kicked off in 2008. So Irish people — and, indeed, others across the world — could find themselves facing very different challenges.
Any slump in world trade as a result of factory shutdowns or blocked borders could lead to a shortage of goods in supermarkets and other stores, for example. Such goods could become more expensive as a result. Any panic-buying triggered by fears of the virus could also lead to shortages. Already a number of pharmacies around the country have reported selling out of anti-bacterial hand gel.
The virus could also mean more people will need to work remotely — but those who can’t do so could see their pay docked.
HOLIDAYS
The outbreak of the coronavirus has prompted the Department of Foreign Affairs to advise against non-essential travel to a number of areas, including China, Iran and parts of northern Italy.
Anyone who has booked holidays to such areas could lose their money unless their trip is covered by travel insurance (see Readers’ Questions on page 7) or they can get a refund from their airline, accommodation provider, travel agent or travel company.
Last Wednesday, Ryanair cancelled up to a quarter of all Italian short-haul flights for a three-week period from March 17 until April 8 in response to the coronavirus. A number of other European airlines have also cancelled flights to northern Italy. Customers whose Ryanair flights have been cancelled have been given the option to seek a refund or to rebook or reroute.
Under EU law, you should be given the choice of a refund or a rerouting if your airline cancels your flight. You don’t have a right to a refund if your airline continues to operate your flight as normal, however. Even if your flight is into an area affected by the coronavirus and your airline hasn’t cancelled flights there, you may still be able to either postpone your flight or change your flight destination free of charge. It is worth checking directly with you airline to see if you can negotiate such arrangements.
INVESTORS
“Equities will be the biggest casualty [for investors] if the virus triggers a global recession,” said Brian O’Reilly, head of investment strategy at Mediolanum Asset Management.
“The areas that will be most exposed are those that are most exposed to economic activity. With travel plans being disrupted, airlines and aircraft leasing are two of the most exposed areas to a slowdown in global growth.”
So too are tourism companies and airports. Any business that has a complex supply chain is vulnerable to the fallout from the coronavirus, according to Sparks.
“Businesses that rely on components from various locations may not be able to produce and will suffer,” he said. “Engineering and hardware companies would certainly fit this criteria.”
Other companies that could be hit by the outbreak include restaurants, shops, shopping centres and the live sports and entertainment industry, according to Torgerson.
So investors in such companies or shares could lose money. So too could investors in high-yield bonds, such as junk bonds, according to O’Reilly.
“With central banks cutting interest rates close to zero in recent years, many investors have bought high-yield bonds to generate some income — but have disregarded the risks that many of these companies pose,” he said.
There are some shares, however, which may not be hit as hard as others. “Although no area of the stock market will be immune to the risks of a slowdown in global growth as a result of the virus, the more defensive parts of the market will hold up better,” said O’Reilly. Defensive stocks include utility, healthcare and consumer staples.
Investors often flock to ‘safe haven’ assets during recessions. “Assets like gold will do well as long as the market remains nervous,” added O’Reilly.
Some global pharmaceutical stocks could soar as a result of the coronavirus outbreak, particularly any company which comes up with a cure or vaccine for the virus. Investors, however, should tread carefully here. “Picking a winning stock on the back of shocks like this is high risk and not recommended,” said Sparks.
Industries such as home entertainment, logistics and medical supplies could also do well, unless they are affected by supply chain disruptions, according to Torgerson.
Despite the recent coronavirus-driven volatility on stock markets, investors should be careful not to panic.
“You should always have a long-term perspective if you are an investor in equity markets,” said Niall Dineen, chief investment officer with Appian Asset Management. “You shouldn’t be invested in equities if you can’t stomach some volatility.
“There’s been a lot of panic selling of shares recently. It’s easy to caught up in the emotion of what’s going on, but the time for people to sell equities is when there’s no bad news. Equity markets will get a bit calmer if they see virus containment working in areas outside China. If the virus passes, the sharp fall in economic activity will end as people return to work.”
No one knows how long the outbreak of the coronavirus will continue for. Some believe the virus could last for a year or more. Some believe the virus will disappear as mysteriously and quickly as it appeared in the first place. Let’s hope it is the latter.