Coronavirus outbreak: Economic fallout could be worse than SARS
With millions of people in China on lockdown, and flights to the world’s second-largest economy being cancelled, the programme Money Mind examines the virus’ impact on the global economy.
SINGAPORE: Some cities are turning into ghost towns, where the streets are empty and shops and factories are shuttered.
This has been the impact of the novel coronavirus (n-CoV) outbreak in China, where more than 42,000 people have been infected and over 1,000 have died in less than two months.
But apart from the human cost, there is the economic toll, and the fallout will be felt far beyond China’s borders.
“The outbreak has occurred when China’s economy is already slowing down. It’s already under certain pressure from the trade war with the United States,” pointed out Moody's Investors Service managing director Michael Taylor.
“I'd be a bit cautious about expecting a really rapid rebound.”
In fact, this epidemic could have a bigger economic impact than the Severe Acute Respiratory Syndrome (SARS) outbreak in 2002-2003, the programme Money Mind finds out. (Watch the episode here.)
In 2003, China was the world’s sixth-largest economy; it accounted for 4.3 per cent of global output. But today, as the world’s second-biggest economy, it accounts for almost 17 per cent of global gross domestic product.
Its economy is not only bigger, but also “more complex”. “There are many more interconnections with the rest of the world,” said Taylor.
In Asia, China’s economic slowdown from the outbreak will be keenly felt in tourism industries such as airlines, casino gaming and also retail.
In Thailand, for example, the Chinese formed a negligible portion of tourists in 2003, but they now make up about 27 per cent of the country’s arrivals.
“The same goes for Singapore: The Chinese tourists have grown manyfold over the last several years,” said ANZ chief economist (Southeast Asia and India) Sanjay Mathur.
Both the transport and tourism sectors here have been the hardest hit. The Singapore Tourism Board expects visitor arrivals to fall by 25 to 30 per cent this year, compared with the 19 per cent slump in 2003.
READ: Singapore tourism to take 'significant hit' in 2020 due to coronavirus, up to 30% fewer visitors expected
Most of the economic damage, say some economists, will be caused by deferred consumption as consumers avoid travel, shopping and eating out. Some of these losses may be unrecoverable.
“It's almost as if we’ve lost our time,” said Mathur. “For example, just because you didn’t go for a movie in the month of January, (it) doesn't mean you’ll see three movies once things change.”
Besides tourist dollars, Asia may also lose export dollars as Chinese demand drops, with domestic consumption accounting for about 60 per cent of China’s economy today.
“China is now the largest export destination for a number of Asian economies,” said Taylor. “So it’s not just outbound tourism from China, but also the ability to export things to China that’s affected.”
Stock markets round the world have also plummeted, with investors spooked by the outbreak. There were sell-offs across a number of Asian markets last week, said Taylor, “because investors find it difficult to price this kind of uncertainty”.
“Of course when you get this kind of sell-off, it tends to increase the cost of funding for borrowers. Companies want to go and borrow in those markets, (but) it’s going to be costlier.”
Businesses have cut back on production and trade as factories in China and elsewhere close temporarily, including those run by Nissan, Tesla and Foxconn, a major supplier to Apple.
Any supply chain disruption in China, the factory of the world, could ripple through the global supply chain and affect countries such as Malaysia, Thailand and Vietnam, which are part of China’s larger supply chains.
Logistics services will also be affected, which will deal a further blow to these supply chains. Hubei province, for example, is a big logistics hub for China, and it represents about seven per cent of the country’s GDP, said Taylor.
“It’s not insignificant, and it sits in the middle of a lot of transport links ... The provinces under effective lockdown at the moment do have an impact in terms of distributions, supply chains and so on.”
But Mathur believes that supply chains can be quickly brought back online. “If you look at capacity utilisation rates in Asia today, they’re significantly sub-optimal. So there’s scope to expand that output,” he added.
“Once they come back to work, instead of producing, say, 10 iPhones a day, they certainly can increase it to 50.”
‘WAIT FOR SOME CLARITY’
During the SARS period, global markets corrected as the outbreak got worse and only hit bottom when infection rates peaked. But there was a sharp recovery when the number of new cases began to stabilise.
So will there be the same reaction this time, when China has a bigger influence on financial markets, and the reaction of Chinese markets can destabilise or calm nerves?
Credit Suisse senior Asia-Pacific investment strategist Suresh Tantia advised investors to “remain on the sidelines” at the moment. “We’d advise waiting for these new cases to peak before investors look to (hunt for bargains) in Chinese equities,” he said.
“Looking at the other Asian markets, we'd advise investors to … wait for some clarity and (for) uncertainty to be removed before they start to (hunt for bargains).”
Watch this episode of Money Mind here. New episodes every Saturday at 10.30pm.