ECONOMIC IMPACT DUE TO OUTBREAK OF CORONAVIRUS
The disease, from China, has 81,279 cases of which 2,770 died (as of February 2020) that leads global industry leaders to fear for finance and the economy. As unprecedented lockdowns begin on a population of around 40 million within the province of Hubei where the disease started, it is clear the effects are beginning to ripple globally.
How coronavirus can impact the economy and markets
The outbreak of a new virus in China has sent shivers through world financial markets, with investors drawing comparisons to the 2003 SARS (Severe Acute Respiratory Syndrome) outbreak in order to assess its potential economic impact.
Impact on the Global Stock Market
Stocks around the world are quickly falling as many face fears over the economic impact of the virus. Even as far as Europe, stocks are preparing for their worst day since the start of October. Furthermore, Wall streets and the Dow Jones Industrial average have fallen around 400 points. Especially within China, consumption, manufacturing and travel are also expected to take a hit for first-quarter growth.
Global markets have also started removing staff from the affected areas where possible and are telling workers to stay home. This has caused impact for many companies. For example, French automotive group Peugeot have said they are working to evacuate 38 international employees along with their families.
Impact on the Global Oil Market
Oil prices fell sharply last Monday as industrial sectors were hit, settling at their lowest in three months. For example, March Brent crude fell $1.37 a barrel – 2.3%. This follows a 6.4% decline last week. This is mainly due to fears of a lower demand for oil globally. This would lead to an even greater oil market oversupply if no further measures are enforced to reduce supply.
The oil minister said felt that the current impact on crude features and other markets was “primarily driven by psychological factors and extremely negative expectations adopted by some market participants despite its very limited impact on global oil demand.” He was convinced that the virus would quickly be contained as a result of the international efforts to prevent its spread.
When surveying their UK customers in the Oil and Gas market, Fairwayrock found that only 24% were concerned about the impact of the Coronavirus on the UK at current. But 76% did say
they would be following the economic impact of the Coronavirus in case they found cause for concern. There was little indication that UK business had been drastically affected by the outbreak.
While some global markets such as the oil industry have alreadyfaced negative impacts, severe damage outside China will depend largely on the spread of the disease. However, it is worth noting that some key assets have seen the stock price rise despite the impact of the virus.For example, gold rose 0.75 per cent to $1,583 per troy ounce.
Impact on the globe’s economy and politics
The World Health Organization has made it official: Coronavirus is the first “global health emergency” of our new era of major power competition. It will affect global markets, but also geopolitics, as well.
It’s already clear that the coronavirus’ impact, though too early to fully measure, will be significant on Chinese and global supply chains, markets and economies; on the legitimacy and the trust enjoyed by the Chinese Communist Party with its own people; and on Asian regional politics and U.S.-Chinese relations, where trust already was in such short supply.
So, it’s not too early to contemplate the potential, unintended consequences of the virus, thought to have originated in a Wuhan wildlife wet market yet already having resulted in more than 210 deaths and more than 10,000 confirmed cases in 19 regions of China and 20 countries around the world. The cases now include the first person-to-person transmission in the United States, and a rare State Department level four advisory of “do not travel” to anywhere in China.
The first effect, and perhaps the easiest of them all to measure, will be the hit to Chinese and other markets and economies, at a time when the world in any case was wary of a “black swan” event that might nudge it toward recession after the world economy’s worst year in a decade in 2019. U.S. markets convulsed Friday, falling by more than 600 points.
Impact on Tourism
Tourism markets will take an outsized hit, as about 163 million Chinese tourists in 2018 accounted for nearly a third of travel retail sales worldwide. Thailand, for example, has already reduced its 2020 GDP forecast, based on expected revenue losses of as much as $1.6 billion from 2 million fewer Chinese visitors, should travel restrictions continue for a further three months.
Chinese tourists account for a large part of tourism in, for example, Thailand (30%) and Australia (15%).
How have financial markets reacted to the outbreak?
Financial markets have reacted relatively strongly to the virus outbreak, but certainly not out of the ordinary yet. Stock markets first levelled off in Asia, but other markets followed quickly. Losses are more significant when compared to the peak in many equity markets, seen on 17 January – as sentiment was riding high on the US-China trade deal and a positive macro backdrop. As result of the risk-off sentiment, demand for safe haven assets such as US Treasuries was fuelled, pulling 10 year US Treasury yields down below 1.6%, where levels above 1.8% were still recorded in the first weeks of January. Moreover, the US dollar and Japanese Yen have strengthened, while many emerging market currencies have weakened. Oil prices have also declined sharply, reflecting a combination of weaker sentiment and concerns that the virus outbreak and its containment measures will lead to lower demand for oil and other raw materials by China.
All in all, markets have clearly been rattled. Given the uncertainty about the severity and global spread of the outbreak, it is too soon to judge whether markets will recover from these losses anytime soon.
Expected economic impact of 2019 coronavirus
The question now is whether the current epidemic will result in (only) temporary limited economic effects. For starters, economic growth in the first quarter of this year will most likely get hurt since the virus outbreak coincides with the period surrounding the Chinese New Year (January 25th), which tends to be a strong period for retail sales. In addition, the Hubei province (where most of the affected cities are located) represents a sizable part of Chinese GDP (4%) and its capital (Wuhan) is an important transportation hub and the second largest car manufacturer of China.
How about the trade tensions?
Finally, we do not expect the coronavirus to create further trade tensions between the US and China. In the recently signed Phase One agreement between China and the US, China has pledged to increase imports of US goods and service by 200bn over the next two years. With a possibly sharp slowdown ahead caused by the virus, China might not be able to live up to this promise. If this is the case, we expect a mild response by the US. The Phase One deal is clear cut about the occurrence of unexpected events or disasters said “In the event that a natural disaster or other unforeseeable event outside the control of the Parties delays a Party from timely complying with its obligations under this Agreement, the Parties shall consult with each other.”
Indeed, one could even argue that the virus outbreak could be the perfect excuse for China to not live up to its pledges, although that may still be to the detriment of the US-China relationship from a medium-term perspective.
How will the global economy be affected?
Compared to the 2002/2003 SARS outbreak, the global economic effects of the 2019 coronavirus are likely to be more severe. Simply put, China is now much bigger, more intertwined with the global economy and more vulnerable than it was 17 years ago.
In 2003 China represented only about 7.5% of world GDP, while it now represents more than 20%.Thus an economic effect on China is likely to have more global consequences that it would have had 17 years ago. China has also become more intertwined in the world economy, China international air traffic was only 5 million in 2000, while it is almost 55 million now. China has also become a major part of global value chains, which (if disrupted) could have major implications for international companies. In addition, China is more vulnerable now than it was 17 years ago: it has much higher debt, trade tensions with a major trading partner and its growth has been steadily slowing down for a number of years, which gives a weak starting point to face such a crisis.
The question is whether the current epidemic can leave a permanent mark on the Chinese economy or, if it spreads further, the global economy. Permanent economic damage often occurs in case of a supply-side shock in the economy. This means supply-side factors, i.e. capital, labor and technology, are permanently affected by drastic events, such as an armed war, natural disasters, financial crises or a global epidemic or pandemic. At this point, the corona outbreak is nowhere near a pandemic and such a pandemic should be considered as a worst case scenario. But under such a scenario, there is a high risk of permanent economic damage. Pandemics in the past, such as the Plague in the mid-14th century or the Spanish flu in 1918-1920, illustrate how these events can leave economies crippled. Due to the Spanish flu, for instance, the US working-age population shrank by half a million people over the course of one year.
Source : Wikipedia