Two decades have passed since a Coronavirus known as SARS emerged in China, which killed hundreds of people and created panic that sent a chill through out the global economy. The virus now rampaging across China could be much more damaging to the world economy.
China has become an essential part of global business since the 2003 SARS outbreak. It's grown into the world's factory, churning out various products such as the iPhone and taking care of demand for commodities like oil, copper and also boasts hundreds of millions of wealthy consumers who spend big on luxury products, tourism and cars. China's economy accounted for roughly 4% of world GDP in 2003; it now makes up 16% of global output.
"The outbreak has the potential to cause severe economic and market dislocation. But the scale of the impact will ultimately be determined by how the virus spreads and evolves, which is almost impossible to predict, as well as how governments respond," said Neil Shearing, group chief economist at Capital Economics.
Compounding the risk is the fact that the world outside China has changed a lot since 2003. Globalization has encouraged companies to build supply chains that cut across national borders, making economies much more interconnected. The major central banks have exhausted after use of much of the ammunition they would typically deploy to fight economic downturns since the 2008 financial crisis, and global debt levels have never been higher.
The virus is snarling supply chains and disrupting companies. Car plants across China have been ordered to remain closed following the Lunar New Year holiday, preventing global automakers Volkswagen (VLKAF), Toyota (TM), Daimler (DDAIF), General Motors (GM), Renault (RNLSY), Honda (HMC) and Hyundai (HYMTF) from resuming operations in the world's largest car market. According to S&P Global Ratings, the outbreak will force car makers in China to slash production by about 15% in the first quarter. Toyota said on Friday it would keep its factories shut at least until February 17. Apple said on Saturday that it was temporarily closing all its stores in China, including this one in Beijing, because of the coronavirus outbreak.
Luxury goods makers, which rely on Chinese consumers who spend big at home and while on vacation, have also been hit. British brand Burberry (BBRYF) has closed 24 of its 64 stores in mainland China, and its chief executive warned Friday that the virus is causing a "material negative effect on luxury demand." Dozens of global airlines have curtailed flights to and from China.
More troubling is the threat to global supply chains. Qualcomm (QCOM), the world's biggest maker of smartphone chips, warned that the outbreak was causing "significant" uncertainty around demand for smartphones, and the supplies needed to produce them.
Economists say the current level of disruption is manageable. If the number of new coronavirus cases goes slow, and China restarts soon, the result will be a fleeting hit to the Chinese economy in the first quarter and a dent in global growth. If the virus continues to spread, however, the economic damage will increase rapidly.
China’s economic growth is expected to slip this year to 5.6 percent, down from 6.1 percent last year, according to a conservative forecast from Oxford Economics that is based on the impact of the virus so far. That would, in turn, reduce global economic growth for the year by 0.2 percent, to an annual rate of 2.3 percent — the slowest pace since the global financial crisis a decade ago. Returning from a long holiday for the first time since the coronavirus’s threat became clear, Chinese investors sent shares in China down about 8 percent on Monday. Stock markets around the world have plunged in recent days as the sense takes hold that a public health crisis could morph into an economic shock.
In a sign of deepening concern, China’s leaders on Sunday outlined plans to inject fresh credit into the economy. That will include a net $22 billion to shore up money markets as well as looser borrowing terms for Chinese companies.
The trade war waged by the Trump administration has prompted a partial decoupling of the United States and China, the two largest economies on earth. Multinational companies that have used factories in China to make their wares have sought to avoid American tariffs by shifting production to other countries — especially Vietnam. The coronavirus might accelerate that trend, at least for a time, should global companies find themselves locked out of China.
No one knows how long the coronavirus outbreak will last, how far it will spread, or how many lives it will claim. It is impossible to calculate the extent to which it will disrupt China’s economy. But China’s formidable stature in the world economy means that the impact of the current outbreak is likely to substantially exceed that of SARS.
After SARS, China suffered several months of economic contraction and then rebounded dramatically. That might happen this time, too. The only certainty is this: Whatever happens in China will be felt widely.
“Clearly China has become a much more dominant player in the world economy,” said Mr. May of Oxford Economics. “It’s just so much more involved in the global supply chain. Over the last decade, it has been the spender of last resort for the global economy.” Source - CNN, NYTimes, Bloomberg, US National Travel & Tourism Office, World Bank
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