The world economy could do without this new problem, after suffering from a China-United States trade war that set global growth on a path to slow to 2.9% this year according to the Organisation for Economic Co-operation and Development, its slowest rate since the 2008-2009 global economic crisis.
Many analysts share the views of US Federal Reserve Chairman Jerome Powell who said last week that it is “very uncertain how far it will spread and what the macroeconomic effects will be.”
But “there will clearly be implications at least in the near term for Chinese output and I would guess for some of their close neighbors,” he said.
China extended its Lunar New Year holiday as a measure to contain an outbreak that has now infected over 20,000 people and killed more than 400, and some firms are now extending factory closures.
As China is a key supplier of many components this could quickly hobble production elsewhere, as evidenced Tuesday, February 4, by South Korea’s largest automaker Hyundai Motor suspending all domestic production this week because of a lack of parts from China.
“The greater the disruption in China, the more likely it is to spread overseas,” said Neil Shearing, chief emerging markets economist at Capital Economics.
“Given that China is now at the heart of many global supply chains, this will have knock-on effects around the world,” he added.
While Asian economies will likely be the first to be hit, a bigger and longer disruption would eventually hurt manufacturers further afield, as well as commodities producers that supply China.
“Slowing Chinese domestic demand will impact the global economy, just as it is trying to recover from the effects of the 2018/19 trade war,” said economists at Dutch bank ING
S&P Global Ratings said its base-case scenario is for a halt to the spread of the virus in April, and in May in its worst-case scenario.
“This suggests that the peak impact on economic activity across Asia-Pacific will be in the 1st and 2nd quarters,” it said, adding that growth would rebound later in the year.
Michala Marcussen, chief economist at French bank Societe Generale, said “one can estimate that China could lose 1 point in annual GDP (gross domestic product) and this would automatically reduce global GDP by 0.4 points.”
This was still “relatively benign,” she said.
While China rapidly overcame the 2002-2003 SARS outbreak, some analysts warn against relying too much on comparisons.
“While useful lessons can be drawn from the SARS experience, we risk being too complacent by using it as benchmark,” UniCredit group chief economist Erik Nielsen said in a recent note to clients.
“China and the global economy are now much more integrated than in 2003” when China accounted for just 5% of global GDP, compared to 20% now.
“The vast expansion in global value chains means that disruptions to production in China might have a larger global impact now than then, especially if multinationals shut down their Chinese factories for long periods,” he said.
If the outbreak doesn’t dissipate soon, authorities are likely to extend travel bans, consumers stay at home and delay consumption, while firms defer investment.
“We think it’s way too early to dismiss this outbreak as just a brief interruption of constructive markets – as much as we wish it were,” concluded Nielsen.
ING calls China “the kingpin of the global commodities market” with huge influence over demand for the raw materials that fuel the nation’s economy.
The oil market is already feeling the pain as China is a major consumer.
European benchmark Brent crude was trading at around $55 a barrel on Tuesday, having slumped more than $10 over the past month.
Members of the Organization of the Petroleum Exporting Countries (OPEC) and their ally Russia are to hold a technical meeting on Tuesday and Wednesday, February 5, to analyze oil price falls since the outbreak of the epidemic.
Bjarne Schieldrop, chief commodities analyst at Nordic bank SEB, said Chinese refineries are cutting back on processing fuel, which means OPEC and its allies “would potentially need to cut an additional 2 million barrels per day in order to avoid surplus.”
He said oil markets are working on the assumption that there will be no acceleration in the spread of the virus outside China and that OPEC and its allies will make sufficient cuts to forestall a lasting surplus. – Rappler.com