Coronavirus and agri-food markets: 4 connections
The novel coronavirus is a human respiratory virus originating in Wuhan City, in the Hubei Province of China, and has spread to nearly 30 countries across Asia, Europe, and North America. Currently, there are no vaccines for the virus, and the World Health Organization (WHO) has declared it a public health emergency of international concern. Several countries have issued travel advisories with flights to and from China being cancelled.
The world has not experienced a global pandemic in a long time, which makes projecting its economic impacts difficult. However, here are four significant connections we can make between coronavirus and agri-food markets:
1. Weaker global GDP
Most of the economic impacts will come from less movement of people and goods, plant closures and delayed investments due to uncertainty. It’s estimated that the 2003 SARS outbreak resulted in a 0.1% decline in global GDP. The Chinese economy has since quadrupled and now represents more than 15% of the global economy. So, the impacts of the novel coronavirus could be greater than SARS.
2. Downward pressures on commodity prices
A decline in travel to and within China is already causing a decrease in fuel demand. Coupled with slower economic activity, it has lowered the price of oil.
The global demand for food should not be immediately affected by the coronavirus. However, if the spread of the virus reaches a pandemic level, it could cause a significant disruption in agri-food trade. For example, pork demand in China is currently high because of the African Swine Fever (ASF). But it could be increasingly difficult to export to China due to possible travel restrictions to and within that country. For example, a shipment could reach a Chinese port, but then face travel restrictions once it arrives.
Income is a major driver of food purchases. A lower income will cause a decline in food demand, impacting agricultural commodities. For example, soybean prices fell despite the Phase One deal between the U.S. and China.
3. Weaker Canadian dollar
A decreased demand for oil and other commodities, paired with global uncertainty, lowers the Canadian dollar. Though lower energy prices and the loonie may slightly improve the profitability of the Canadian agri-food sector, disrupted trade flows would likely offset any positive impacts of a softer loonie.
4. Lower interest rates
Weaker commodity prices and global trade could result in lower inflation. In response, central banks may need to lower interest rates and inject liquidity into the marketplace.
Coronavirus is already a human tragedy and economic consequences still unknown
The magnitude of the coronavirus’s impact on the economy will depend on how rapidly it’s contained. In the worst economic scenario of a pandemic, the virus could cause a global recession. In a best-case scenario, the spread of the virus is rapidly contained, and the economic impacts are limited to those already experienced.
Article by: Sébastien Pouliot, Principal Economist