A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK
Coronavirus has quickly emerged as a risk to Chinese and global economic activity. The human effects matter most but the disease is having a marked impact on some areas of economic activity in China. The ultimate economic effect, is, like the path of the virus, unknowable. This week’s briefing reviews the evidence and looks at the lessons from previous infections.
The human toll of coronavirus is significant and continues to rise. The virus has so far infected over 37,000 people in China and killed over 800. An obvious comparator is the outbreak of SARS (severe acute respiratory syndrome) in 2002–03 in which 8,000 people were infected and about 800 died, mainly in Hong Kong and mainland China. Coronavirus has a lower fatality rate but is more infectious than SARS. The number of deaths from coronavirus so far is significantly higher than the comparable period during the swine flu epidemic of 2009–10.
Most cases of coronavirus are in China, but many other countries have reported the spread of the virus. We do not yet know the degree to which coronavirus is contagious or deadly, and for how long the spread of the virus will continue. However, the number of coronavirus infections and deaths already exceeds the final total for SARS, suggesting a significantly greater impact.
Beyond the threat to human welfare, the virus has had a visible effect on some aspects of everyday life in some parts of the country. The Chinese authorities have imposed unprecedented travel restrictions and many local areas have extended the Lunar New Year holiday to February 10. This had affected railway, road and air travel and retail, tourism and entertainment activity. Congestion on roads in China’s top 100 cities is running well below usual seasonal levels.
Three factors suggest that the economic impact on China will be greater than SARS. The first is the shutdown of Hubei province, considered the source of the viral outbreak. Hubei province is home to 59m people and, according to Nomura, accounts for 4.5% of Chinese GDP and 7% of Chinese car-assembly capacity. Fitch Solutions estimates a quarter of major Chinese infrastructure projects are located in the provinces most affected by the virus.
The second is the timing of the outbreak during the Lunar New Year holiday. A good deal of tourism, retail and entertainment activity is concentrated in this period and not all of lost spending will come back.
The third factor is that China is far more dependent on consumption today than it was in the early 2000s when exports accounted for a greater share of the economy. Restrictions on movement of people and goods are likely to dent consumer spending.
China plays a far greater role in the global economy than in 2002–03, suggesting that the coronavirus will also have a greater economic impact on the rest of the world than SARS. The Chinese economy, measured in current US dollars, is almost ten times larger than it was in 2003 when the SARS virus peaked. China now drives one-third of global growth. Disruption to Chinese manufacturing activity – Hubei is a major supply chain hub – could have knock-on effects globally.
Commodity prices have fallen in anticipation of weaker Chinese demand, with the Brent crude oil price down by 20% since early January. The copper price is 9% lower than in mid-January. On Friday the FT reported that the global gas market has been “thrown into turmoil” by the threat of sharply lower Chinese demand.
Disruption in domestic Chinese production could radiate out to the rest of the world through complex supply chains and exports. Apple’s main plant for iPhone production in Henan, run by Foxconn, was closed last week because of the virus. Manufacturers that rely on Chinese inputs from the affected area may struggle to maintain production. South Korean automaker Hyundai has halted production at all its Korean plants after exhausting its stock of Chinese components. Automakers in Europe and the US report that they are weeks away from doing the same. The Nikkei Asian Review reported that key suppliers to Apple are expecting labour shortages due to travel restrictions.
In an integrated world, global financial, travel and trade networks act as transmission mechanisms for economic shocks from one region to another. The coronavirus may add impetus to the movement towards restoring and creating shorter and more transparent supply chains.
The world increasingly relies on Chinese consumers who are the world’s biggest buyers of cars and smartphones. Outside China, the hospitality, tourism, retail and luxury goods sectors are heavily dependent on Chinese consumers, who are facing travel restrictions both from their own government and from a growing number of countries, including the US.
The extent of the economic impact depends on the virulence of the disease and when it reaches a peak. But history offers some reassurance about the impact of destructive external shocks such as disease, terrorist attacks or natural disasters. People and systems often prove adaptable and resilient. Some of the affected economic activity is postponed, rather than lost forever. Disasters prompt a countervailing response from government. In China a huge public health and information programme has swung into action; China’s central bank has injected $173bn of liquidity into financial markets. While disruptive, external shocks tend not to alter the structure of the economy or the long-term path of growth.
Sentiment in financial markets about the effects of the virus has fluctuated. A sharp fall in Chinese and global equity markets in the latter part of January was followed by a bounce which, in the case of the US, has taken equities to new highs. This could be related to expectations that slower growth will lead to looser monetary policy and rising expectations that the virus will be contained to China (two-thirds of the cases are in Hubei and 99% in China).
Markets will be paying close attention to the scheduled reopening of Chinese factories today, February 10. The FT reported last night that many are likely to remain closed. Among those that reopen, some are likely to operate at lower capacity because not all workers will be able to return to their employers.
The coronavirus creates new risks for global growth. Those risks are greatest in China and East Asia. The human, sectoral and business effects are likely to be most pronounced; short-term activity is likely to prove choppy. The effects on Chinese GDP growth for the year as a whole are likely to be smaller; on growth in the West smaller still. Deloitte’s China Research Monthly Outlook notes that the hit to Chinese GDP should be concentrated in the first quarter. Goldman Sachs last week estimated that, assuming the virus peaks in the first quarter, the outbreak is likely to reduce global GDP by 0.1 to 0.2 percentage points, giving a global growth rate 3.25% this year. A later peak, in the second quarter, would reduce growth by 0.3 percentage points.
Such estimates are speculative, but they illustrate how coronavirus could weigh on growth. The evidence from previous external shocks suggests that coronavirus, though disruptive and destructive, is unlikely to materially change the outlook for global growth this year. Economic systems tend to be adaptable and resilient; offsetting government action helps bolster activity. Coronavirus is a serious health emergency – but its effects are likely to be greatest at the human and sectoral level, not at a macroeconomic one.