Coronavirus: Rising risk to global economy

Even as the emergence of fresh Coronavirus cases in China are subsiding, it’s the far-reaching impact on the global economy remains relatively unclear. And, as the Chinese economy continues to be in quarantine mode, through the lockdown of manufacturing activity, the shock to the rest of the world could be significant.

Chinese industry and commerce was supposed to stir back to life last week, after an extended new year holiday triggered by the rapid spread from Wuhan of the highly contagious coronavirus, the Chinese government ordered them to wait till the local government approval to reopen the plants

Most of the manufacturing units received a notice from the government with regard to the change in policy.

Businesses in large parts of the country forced on a prolonged shutdown as more than 64,000 cases of the virus in China alone are found.

This is worrisome for the Chinese economy, which is now more than four times larger than it was at the time of the 2002-03 Sars outbreak — and it is considerably more important as a source of demand and for its central role in many industrial supply chains.

As the immediate outlook for the Chinese economy worsened this week, shipping rates have fallen to record lows, oil demand is now expected to grow at its slowest rate in almost a decade.

The luxury industry is terrified about the idea of a long lull in Chinese tourists traveling abroad.
The possibility of a deep slowdown in China comes at a time when growth in the eurozone is already limping and when US President Donald Trump is banking on the avoidance of an economic hiccup as he campaigns for re-election.

In China, the evidence of a sharp deceleration is more than just anecdotal — it is starting to appear in broader indicators on economic activity.

It may be recalled that the global financial crisis pulled down Chinese growth in gross domestic product to 6.4% in the first quarter of 2009, cutting it in half from the same period a year earlier. It is likely to fall to as low as 3.2% this quarter, half the rate for the first three months of 2019.

There are fears of an even larger fall in Chinese and global GDP from the Coronavirus.

Value chain and supply chain disruptions will have a much larger impact than China-US trade frictions as once supply chains are relocated and replaced, it’s extremely difficult to get them back.

China is the world’s largest importer of a wide range of products from raw commodities such as crude oil to intermediate goods used in the manufacture of everything from hair dryers to automobiles.

Outbound tourism, worth $278bn in 2018, is also drying up as countries impose increasingly stringent bans on visitors from China.

Beijing’s economic policy response to the epidemic has so far been modest, in keeping with the government’s longstanding campaign to rein in high debt levels and stamp out risky financial practices.

The battle against the coronavirus undoubtedly will be very costly and damaging to what China has achieved so far in reining in financial risks over recent years.

As regards the impact of Coronavirus on the US GDP growth, it is expected to be minimal. The decline in Chinese tourism and weaker demand for American exports is unlikely to have a major effect, provided the outbreak is contained relatively quickly.

China lags well behind Canada, Mexico and the UK in sending visitors to America.

Ultimately, the extent of the economic damage wreaked by the coronavirus, both within China and elsewhere, will hinge on how quickly Mr. Xi’s administration can nudge the workforce back to action while also tackling the rise in infections.

Experts believe that the risks are greater than the market is assuming. Only in March, it will be clear whether the impact from the Coronavirus is a temporary shock that is already over, or it will have evolved into a more profound economic and human shock.

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