Coronavirus is significantly impacting mainland China’s economy. We expect GDP growth of just 4.1 per cent in annual terms in the first quarter of 2020 compared with 6.0 per cent in the previous three months. But China’s standing in the world economy means we have lowered our global forecasts too.
Much about COVID-19 is still uncertain. However, we are sure of two things. First, China’s importance to the global economy has more than doubled since the SARS outbreak in 2003. Second, whatever COVID-19’s severity and duration, the measures to contain it and the public’s reaction are already having an economic impact.
Transport, tourism, retail, restaurants, education and many areas of manufacturing production in mainland China have all been severely disrupted or curtailed.
Our base-case scenario assumes the virus gradually becomes contained during the first quarter of 2020, allowing China’s growth to recover to 5.1 per cent in the following three months and 6.0 per cent by the third quarter as business re-stocks and activity recovers. Our GDP forecast for the whole year is thus downgraded from 5.8 per cent to 5.3 per cent.
That takes nearly 0.1 of a percentage point off our global growth forecast with a similar cut stemming from revisions in other Asian economies. Our global forecast for 2020 thus falls from 2.5 per cent to 2.3 per cent, though our predictions for the US and Eurozone are unchanged as US consumer spending has remained more robust than we expected and our Eurozone forecast of just 0.7 per cent was already very low.
COVID-19’s channels of influence on the global economy are numerous. The hit to tourism revenue poses the biggest immediate risk to growth in many Asia-Pacific countries. Nearly 14 per cent of Thailand’s GDP comes from tourism with well over a quarter of arrivals from mainland China. Singapore officials estimate the virus could cut its tourist income by 25-30 per cent in 2020.
Other Asian economies may also be affected by reluctance to travel to or within the region. Europe and the US will see fewer arrivals from China.
The longer it takes to lift or even ease the measures imposed to contain COVID-19, the greater will be the hit to world trade. Most Asian economies’ direct exposure to mainland China’s domestic demand growth is very high.
But the impact on global supply chains is as important for major trading partners. Japanese and Korean car firms have temporarily halted production because of shortages of components from China, with US and European companies also affected.
That will potentially delay any stabilisation of the global auto industry. Electronics looked like being one of the strongest industrial sectors in 2020, however, and China is at the centre of its global supply chains so some products’ availability could be disrupted.
For many countries the virus’s impact has been falling commodity prices. Lower base metal prices will hit producers such as Chile. For some countries lower commodity prices could provide a positive offset. If oil stays around USD55 a barrel through 2020 that could cut US inflation by about 0.8 per cent points and Germany’s by around 0.6 per cent, lifting real wage growth, which could help sustain consumer spending. But if the virus is not contained soon it may hit global consumer spending as well by deterring people from shopping and travel to affected countries and potentially even through weaker labour markets.
Indeed, the longer it takes to contain the spread of the virus, the greater the likelihood that uncertainty itself weighs on business confidence, further delaying any improvement in already-weak investment.
China has already announced interest-rate cuts and targeted fiscal support and we expect more but expectations that some lost growth from early 2020 is eventually recouped suggest that a much bigger policy stimulus is unlikely unless the situation worsens beyond our base-case assumption.
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