Sunday, February 2, 2020

Bracing for Economic Pain From Coronavirus

Bracing for Economic Pain From Coronavirus

The impact of the outbreak of the virus will also spread from China to around Asia and other parts of the world, analysts say.

Traders work on the floor of the New York Stock Exchange on Jan. 27, 2020 in New York City. U.S. stocks fell sharply on Monday as fears of the spreading coronavirus WHILE IT IS TOO EARLY to determine the global economic impact of the coronavirus outbreak, early signs suggest many countries will experience a drag, particularly those whose economies are tied closely to China – the origin of the outbreak and the country that will experience the greatest shock, say economic analysts.

The 2-month old outbreak had sickened nearly 10,000 people by Jan. 31, drawing comparisons to the global SARS outbreak more than 16 years ago, but has largely been limited to mainland China.

Officials at the World Health Organization declared on Jan. 30 that coronavirus outbreak is an international health emergency, as the death toll from the virus surpassed 200 – all so far in China.

Many experts acknowledge that the initial economic outlook is not looking good, particularly for industries such as tourism, travel and retail that depend on consistent and uninterrupted flows of consumers.

"This is the beginning of the process which is unfolding, so it is much too early to know the scale and scope of the impact. All I can say is that it is going to be significant and it will hurt," says Steve Tsang, a professor and director of the SOAS China Institute at SOAS University of London.

And just as the disease has to this point proven difficult to contain – despite transportation restrictions into and out of the Chinese city of Wuhan, where the outbreak is believed to have originated – the economic fallout is expected to be just as difficult to isolate. Given the number of high-population areas impacted within China and the country's status as one of the world's most significant players on the international trade scene, it will be difficult to quarantine coronavirus impact to a single sector, region or country.

"We identify these economies like Thailand, for whom Chinese tourism has become important" as among the nations likely to be most heavily impacted by the coronavirus outbreak and China's response to it, says Louis Kuijs, the chief Asia economist at Oxford Economics based out of Hong Kong. "The Philippines, also, on the tourism side. Singapore is also sizable. And the most exposed economy is Hong Kong. I would think the situation in Hong Kong, on the economic side, is pretty serious in the short term."

China to Experience Greatest Economic Impact

Although more than a dozen countries have confirmed the spread of the coronavirus strain from China, analysts predict that China will still feel the brunt of the economic blow. Travel into and out of China has already been complicated by the virus.Neighboring countries and territories such as Russia and Hong Kong have moved to better control cross-border migration in recent days. Domestic businesses and international companies operating in China have shuttered storefronts or asked workers to extend their Lunar New Year holiday, with Starbucks announcing the closure of more than 2,000 stores. Popular tourist attractions such as Shanghai Disneyland have also closed, and Honda Motor Co. is among several companies that has been working to withdraw employees from particularly hard-hit regions of China.

Major airlines such as American and Delta have suspended some services into and out of China in response to the outbreak. Tour companies such as Intrepid Travel have temporarily canceled trips to China. International governments such as Japan and the United States have even begun withdrawing citizens from China, with the U.S. evacuating more than 200 citizens from the country earlier this week.

"The fact that you have a lot of government measures and company decisions, on the one hand, it's a good thing," Kuijs says. "Hopefully it can control the spread. But on the other, that short-term economic impact is going to be felt."

Especially during a Lunar New Year season in which China traditionally sees tourism and consumer spending spikes, the lack of tourism, foot traffic and open storefronts throughout parts of the country and surrounding Asian region will have a considerable drag on economic output.

"China will be affected the most, but as it is such an important country for supply chains and its demand for goods and services (especially its large tourist contribution), other countries will feel some pain too, at least temporarily," John Vail, chief global strategist at Nikko Asset Management, said in a statement Wednesday. "A decent portion of the absence of Lunar New Year spending in many cities and extended holidays will not likely be made up by future spending and production."

Short-Term Worries: Slowdowns in Tourism, Industrial Output

The outbreak shaving between 0.5 percentage points and 1.5 percentage points from Chinese GDP growth in 2020 is not outside the realm of possibility, according to an estimate published this week by the Economist Intelligence Unit.

"Travel, tourism and hospitality will be the most immediately affected sectors, but manufacturing could suffer if migrant workers are prevented from traveling back from their home areas after the Lunar New Year holidays," Simon Baptist, global chief economist and managing director of the Asia unit at the Economist Intelligence Unit, wrote in a report Thursday. "Wuhan, the epicentre of the outbreak, is a key location for China's semiconductor industry, the development of which has been prioritised as a result of U.S. export restrictions."

Separately, an economist at the Chinese Academy of Social Sciences, predicted on Wednesday that Chinese GDP growth could realistically hit or even drop below 5% in 2020 – a growth slowdown the likes of which Beijing hasn't seen since 1990.

"We are talking about immediately the impact on tourism - both inbound from outside China and within China - consumption, and face-to-face servicing industries being hit, if the general public in China remain concerned about safety after the end of the extended holiday," Tsang says, suggesting there may be "problems with supplies to factories and manufacturing will be affected, which will in turn affect negatively trade and the supporting industries for servicing manufacturing and trade."

Kuijs says there is also fear in the short-term that industrial output will be impacted to some extent. Although he notes this situation is different from the recent Chinese trade tension with the U.S. in that international companies are unlikely to completely upend established supply chains in response to the coronavirus, the industrial regions of China may see less production in the days and weeks ahead and may find themselves hurting for buyers given the global concern over the outbreak.

That's bad news for the Chinese economy and for a global trade landscape that had finally appeared to enter calmer waters after commerce tensions between the U.S. and China eased with the signing of a partial trade deal.

"I've already heard episodes where people have said foreign importers didn't want to come to China and were reluctant to accept goods, because they were afraid of contagion," Kuijs says, though he suggests this sort of reaction is likely to dissipate once the situation is more actively brought under control. "My hunch is still that the very worst fears and anxieties will probably go away relatively soon, once everyone realizes the epidemic is contained."Economists Point to SARS As a Predictive Model

The 2002-03 SARS outbreak is the benchmark to measure the potential impact of the coronavirus outbreak. While SARS sickened fewer people than the coronavirus, nearly 800 people worldwide died from that pandemic.

A 2004 study suggests the SARS outbreak set the global economy back $40 billion – which, adjusted for inflation, would translate to roughly $56 billion today. China lost more than a full percentage point from its GDP in the short-term as a result, and Hong Kong's GDP dropped by more than 2.6%. Taiwan and Singapore each lost roughly half a percentage point in GDP growth from SARS, but the outbreak's impact on the rest of the world was negligible.

A soft global economic landscape and already faltering growth metrics out of China suggest the world's second-largest economy and its neighbors in Asia may not be able to bounce back nearly as forcefully and nearly as quickly as they did in the early- to mid-2000s.

"In 2003, when SARS broke out, the background was one of really fast growth. That allowed for growth to jump back pretty soon," Kuijs says. "Of course, China is still growing, but it's growing at half the pace as it was then. So we're wondering how fast can growth recuperate."

The outbreak's most tangible impact has been on international investments. China's Shanghai Composite Index dropped 2.75% on Jan. 23 before closing for the Lunar New Year holiday, and the local government has since extended that holiday through this week. Japan's Nikkei 225 index closed Thursday down more than 3.4% from where it sat a week ago. Similar losses have been felt throughout Asia this week as the outbreak weighs on investor sentiment.

"In addition to its health effects, the coronavirus has rattled investors and financial markets, particularly in China and financial hubs across Asia," a team of researchers at Wells Fargo Securities wrote in a research note Wednesday. "Since its peak, the Shanghai Composite equity index has sold off about 4.7%, while the Hong Kong Hang Seng equity index is down over 6.0%."

And although the U.S. stock market has been up and down throughout the week, the coronavirus outbreak is expected to eventually take a bite out of earnings reports of U.S. companies operating in China. Outfits such as Estée Lauder, Nike and Apple are exposed to China through either revenue streams or supply chains, and some analysts worry that the virus and the government's response to it will bleed into quarterly earnings reports.

"Anxieties on Wall Street could exert downward pressure on consumer confidence in the following days," John Leer, an economist at Morning Consult Economic Intelligence, wrote in a research note Wednesday. "However, short of a full-blown epidemic in the U.S., there is no immediate reason to believe the coronavirus poses a long-term threat to consumers' finances or the country's economic outlook."

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