China, the world’s second-largest economy, has been paralyzed for more than three weeks.
The country has been at a virtual standstill since the New Year holiday ended at the beginning of February. While now getting back to business, much of China’s industry has been shut down, people have steered clear of stores and restaurants, and travel has been sharply curtailed.
China has quarantined 40 million people in the city of Wuhan, where the coronavirus first broke out.
But perhaps even more people than that have been sealed up in towns and villages in the region after officials closed highways and shut down regional transport to keep the virus from spreading.
The province of Heilingjiang in northern China has threatened the death penalty for people deliberating spreading the virus.
The quarantine is the largest seen in modern times. Gauden Galea, the World Health Organization’s China representative, called it “new to science.
Bad for Business
IKEA, Nike, Starbucks, and Levi Strauss are a few of the retailers that have shuttered their stores in China. Walt Disney resorts in Hong Kong and Shanghai are closed.
China’s shoppers account for 11 percent of the world’s imports, up from 2.7 percent in 2000.
How bad will the damage be?
Deutsche Bank expects China’s economy to slow to 3 percent in this year’s first quarter, compared to 4.6 percent during the same period in 2019, and global growth to lose 0.5 percent from January through March.
Oxford Economics takes a darker view, reducing its outlook for global growth in 2020 from 2.5 percent to 2.3, the weakest performance since 2009 and bringing the world to the brink of what the International Monetary Fund defines as a recession.
According to Ana Boata, an economist at Allianz Research, “The coronavirus outbreak is likely to keep the global manufacturing sector in recession in the first half of 2020… electronics and computers are most at risk.”
For every percentage point of growth China loses this year, Germany would lose only 0.06 percent and Europe overall 0.01 percent, according to the Ifo Institute, a German economic think tank.
But ING Think’s Chief Economist, Robert Carnell, believes that too many small forecasts don’t factor in the loss of demand.
For example, fewer Chinese are now traveling outside of the country, denting other nations’ tourist economies and cutting sales of luxury brands.
The 2003 SARS virus epidemic in China offers a historical analogy.
It clipped two points of the country’s growth rate in the second quarter of that year. Growth bounced back in the third quarter, but the outbreak trimmed an estimated 1 percent of China’s growth that year.
The damage was done mainly to tourism, travel, and leisure. There was little economic disruption outside of China.
At the time, China accounted for only 4.3 percent of the world’s economy. This year, it’s almost 17 percent, according to the International Monetary Fund, and far more tightly interwoven with the rest of the world’s trade and finance.
Also, back in 2003, China was growing at 10 percent annually, helping to cushion the economic shock. Now China’s growth rate is 6 percent and was decelerating even before the virus struck.
Although analysts are unable to predict the epidemic’s long-term impact on China’s economy, it could cut China’s GDP by as much as 2 percentage points during 2020’s first quarter, according to economists at Macquarie Bank.
TREND FORECAST: There is no doubt the coronavirus will negatively impact the Chinese and global economy. Considering the hard data indicating a worsening global economic slowdown prior to the virus outbreak, should it continue to escalate and/or a “black swan” event occur, it will dramatically drive down equity markets and economies worldwide, while pushing gold prices higher and many commodity prices, such as copper and oil, much lower.
