Economic activity in several major economies was declining before the coronavirus hit.

In last week’s post, we discussed how the underlying components of Q4 U.S. GDP showed signs of weakness in the consumer and corporate area. This week the Q4 GDP numbers were released for the Eurozone and Japan. Q4 GDP in the Eurozone increased +0.059% from Q3. That is an annualized rate of +0.24%. Year-over-year, Q4 GDP grew at a +0.94% rate, the slowest since Q4 2013. 2019 GDP grew at 1.17%, also the slowest rate since 2013. Part of the weakness in Eurozone GDP was driven by weakness in their two largest economies, Germany and France. Q4 GDP growth in Germany was +0.0% and -0.1% in France.

Source: FRED.

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In Japan, Q4 GDP declined by -1.6% compared to Q3, and by -0.40% y/y. Private consumption declined -2.90% and business spending declined-3.79%. That is the slowest quarterly GDP growth since Q2 2014 and the slowest y/y growth since Q3 2014.

Source: FRED.

Looking at the recent GDP data for the U.S., Eurozone, and Japan would suggest that all of them were in weakened positions prior to whatever the fallout will be from the coronavirus to start 2020. From an economic standpoint, all we can do is watch the data that gets reported for the first quarter to see what the impact will be (some of the January data from Asia has been fairly negative).

From a market perspective, investors appear to be expecting some downside to economic activity, when looking beyond broad measures like the S&P 500. Since the start of 2020, the U.S. dollar and other safe-haven currencies have been positive, commodities prices have declined, gold has increased, U.S. Treasury rates have declined, and defensive industries like Utilities and Real Estate have outperformed.

Source: Bloomberg.

The goal of this post is not to make a call on the coronavirus, but to note that several major developed economies were in weakened positions prior to the potential impacts from the measures taken to reduce the spread of the virus. The market signal is currently suggesting that investors are expecting the economic activity to be weaker in Q1. This would align with the defensive posture we have been maintaining in portfolios.

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.

Rank Dawson, CFA, FDP

Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC