China’s effort to contain the Wuhan coronavirus could have significant spillover effects on the global economy, according to analysts and other experts who are closely monitoring the outbreak.
There have so far been 20,630 confirmed cases of the new coronavirus and more than 425 deaths, almost all of which have been in China, according to the latest statistics from the World Health Organization.
But China’s increasing role in the global economy means the longer the crisis drags on, the greater the economic fallout could be.
A recent report from the economics unit of Royal Bank of Canada noted that China now accounts for nearly 20 per cent of global gross domestic product, compared to around nine per cent at the time of the SARS crisis in 2003.
“A disruption to economic activity in China, even if temporary, will have greater implications for the global economy now than in the past,” the RBC report said. ”And the longer the disruptions to economic activity in China last, the greater the potential for temporary spillover into global supply chains.”
The Chinese economy has also become much more “consumer-led,” rather than driven purely by manufacturing, according to Pedro Antunes, the chief economist at the Conference Board of Canada. This broadens out the possible economic effects to industries such as automotive manufacturing, tourism and even lobster fishing, which have all benefited from active Chinese consumers.
“This will have an impact,” Antunes said.
China has responded to the outbreak by locking down entire cities and restricting travel, something that will likely come with an economic cost.
Capital Economics recently cut its first-quarter forecast for China’s economic growth to around three per cent year-over-year from 5.5 per cent.
Chief economist Neil Shearing noted the longer the crisis goes on in China, the greater the global impact might be. He also pointed to the potential for the crisis to trigger a stock market correction.
“Given that we’re ten years into a global equity bull market, the potential for the virus to trigger a significant market correction is much greater now than it has been during previous epidemics,” he said in the report.
The potential for the virus to trigger a significant market correction is much greater now than it has been during previous epidemics
Antunes said a tumbling stock market could create a “fear factor” that weighs on business confidence. Canadian stocks have managed to rebound somewhat since the WHO’s first situation report on Jan. 21, with the S&P/TSX Composite Index now down around 0.2 per cent since then.
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Canada has so far had four confirmed cases of the new coronavirus, with a possible fifth case announced on Tuesday.
S&P Global Ratings said Tuesday that its “base-case projection” was the coronavirus crisis will stabilize by April, with the agency’s worst case being the virus stops spreading by late May.
Consumer demand may take even more time to pick up steam again. And for Canada specifically, the country’s trade ties with China were already strained after the arrest of a Huawei Technologies Co. Ltd. executive in 2018.
“This is going to affect that further, obviously,” Antunes said.
Judging from market moves the Canadian economy could also be affected by a drop-off in energy demand stemming from the coronavirus. Over the past month, the benchmark for West Texas Intermediate oil has fallen to around US$50 a barrel from US$65.
“While that drop is expected to be temporary, it will presumably reduce revenue for the Canadian oil and gas sector in the near term,” RBC’s Jan. 31 report stated.
News of coronavirus-related moves by companies is already beginning to trickle out, such as fashion company Ralph Lauren Corp. disclosing Tuesday it had shuttered around half of its 110 stores in China because of the outbreak.
The tourism sector is likely to be affected as long as the virus is looming as well, with a number of airlines, Air Canada included, having already suspended flights to China. On Tuesday, Royal Caribbean Cruises Ltd. said it had cancelled eight cruises out of China due to the outbreak, while the government of gambling metropolis Macau said it decided to suspend casino operations for two weeks.
“The outbreak has the potential to cause severe economic and market dislocation,” Shearing wrote. “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. If the epidemiologists are unsure how events will play out, then you should be sceptical of any economist that claims to know better.”