News Code: 2965

Date of Release: 2020-02-02

Fears of global economic slowdown as virus follows trade war

With tens of millions of Chinese people quarantined inside their cities and thousands of factories closed, it is already clear that the coronavirus is about to sideswipe the global economy. Last year’s tit-for-tat trade war between China and the US, which involved both sides slapping import tariffs on hundreds of billions of dollars’ worth of […]

With tens of millions of Chinese people quarantined inside their cities and thousands of factories closed, it is already clear that the coronavirus is about to sideswipe the global economy.

Last year’s tit-for-tat trade war between China and the US, which involved both sides slapping import tariffs on hundreds of billions of dollars’ worth of goods, knocked China’s already ailing GDP growth rate down to six percent in 2019 and helped depress global growth: It fell from 3.6 percent in 2018 to three percent last year, the Guardian reported.

A Chinese official warned last week that the spread of the virus from its beginnings in Wuhan to about 10,000 victims across the country would add to the damage from the trade war, and possibly cause more economic harm than the Sars epidemic, almost two decades ago. And with eight key regions and two cities in China subject to closure of non-essential business until at least February 9, the significance of the epidemic is beyond doubt.

Zhang Ming, an economist at the Chinese Academy of Social Sciences (part of Beijing’s state council), predicted that China’s annual growth rate could drop below an annualized five percent in the January-March 2020 quarter. That would be a sharp slowdown compared with six percent annualized growth in the previous quarter.

Goldman Sachs believes the fast-spreading coronavirus will knock 0.4 percentage points from annualized growth in the US over the first quarter of 2020, as Chinese tourism to the US dips and exports of American goods to China take a hit. Its central forecast is for a partial rebound in US growth in the second quarter, but the risks are “skewed towards a larger hit”.

 “A change in the news flow could lead to increased domestic risk-aversion behavior or a sustained tightening in financial conditions. A larger outbreak of the virus in the US or the fear thereof could lead to a decline in domestic travel, commuting and shopping,” Goldman noted.

In 2002, Sars spread virtually unchecked to 37 countries, causing global panic, infecting more than 8,000 people and killing about 750. The coronavirus is spreading at a faster rate.

The Center for Economics and Business Research (CEBR) said that because those who contract it are infectious before experiencing symptoms, the coronavirus could be much worse. Quarantine measures will largely be “a matter of shutting the stable door after the horse has bolted, unless they apply well beyond those who are currently infected,” it said.

The Chinese authorities were praised last week by the World Health Organization (WHO) after it declared the coronavirus to be a public health emergency of international concern. But both the communist-run government in Beijing and the WHO have faced severe criticism for reacting slowly given what is known about the rapid spread of the virus.

It is not easy to estimate the extent of the economic damage the virus is likely to inflict, but it is possible to use the Sars epidemic as a guide. Pantheon Macroeconomics estimated that Sars dragged China’s quarterly growth rate down to 1.8 percent in April-June 2003, from an average of 2.8 percent. The CEBR said the knock-on effect to world GDP was a fall in 2003 of between $30 billion and $100 billion, which was equal to between 0.08 percent and 0.25 percent of global GDP.

“Our worst-case calculation assumes that the coronavirus has a six times multiple effect on the Chinese economy. As the Chinese economy is nearly four times larger relative to the world economy [than in 2002], scaling up for this as well would create a world GDP negative impact of 1.8 percent to six percent based on the retrospective estimates of the impact of Sars,” the CEBR said.

“With world GDP set to grow by 2.9 percent this year before the coronavirus impact became apparent, it is clear that unless a cure and a vaccination are found rapidly, the fragile recovery that we predict is at risk.”

Britain and the rest of Europe have already had people return from China with confirmed or suspected cases of the virus, leading many airlines to suspend flights to China and in some cases Hong Kong, though not Macau so far. The US and Canada have also seen their first cases and warned citizens not to travel to China.

The economic impact, though, will be most keenly felt across Southeast Asia, where China is not only a major trading partner but a source of vital revenue from tourism.

A decline in tourism spending has already hit the main cruise lines. US operator Royal Caribbean Cruises has cancelled three trips scheduled in February, which will hit 2020 earnings by about 10 cents per share, the company said. A ship owned by the Carnival Corporation, which is listed in New York and London, was briefly put in quarantine in the Italian port of Civitavecchia, trapping 66 Britons and 6,000 other passengers.

Shares in Norwegian Cruise Line Holding, Royal Caribbean and Carnival were all at least five percent lower on the New York stock exchange following the Italian incident before recovering some of their losses on Friday.

The consultancy S&P Global Market Intelligence said the decision of regional governments to extend factory closures beyond February 2 to control the virus’s spread will be a major blow to China’s GDP.

International companies are beginning to find ways of circumventing Chinese companies to obtain electronics parts, though US commerce secretary Wilbur Ross made it clear he thought most firms were unlikely to question strategic business relationships as a result of the outbreak.

That said, Apple, General Motors, Ikea and Starbucks have closed much of their Chinese operations, as have many other foreign companies.

Chris Rogers of S&P said commitments to buy $33.4 billion of US agricultural exports this year, made by Beijing as part of a truce in the trade war, might be difficult to meet.

But he believes there will be an opportunity later in the year to make up for lost time. The expectation is that the coronavirus will soon be under control and the overall effect, even on the Chinese mainland, will be limited.

The consultancy Oxford Economics has cut its forecast for global growth this year from 2.5 percent to 2.3 percent, which would be the lowest since the 2008 financial crash. “Writing in Caijing magazine, Zhang Ming said the coronavirus’s economic impact could be “significantly bigger” than Sars, based on a forecast that the outbreak would peak in mid-February and end by April.

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