Commentary: Novel coronavirus outbreak weighs heavily on global economy

LONDON: Two weeks after the 2011 Tohoku earthquake in Japan, carmakers began to halt production lines on every continent as they ran short of a specialised paint pigment that allowed their cars to glisten.

It was manufactured in just one factory near the stricken Fukushima nuclear plant.

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Companies in complex manufacturing industries vowed never to be so geographically exposed again.

But a week after the World Health Organization declared the coronavirus outbreak a public health emergency, the robustness of global supply chains is once more being tested.

Fiat Chrysler warned this week that one of its European plants could be forced to halt production within a fortnight and Chinese copper traders have delayed imports of the commodity from Chile to Nigeria, highlighting how the economic consequences of the outbreak are extending worldwide.

The logo of car manufacturer Fiat is seen in Zurich, Switzerland October 30, 2019. (File photo: REUTERS/Arnd Wiegmann)

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UNCERTAINTY ON BUSINESSES AROUND THE WORLD

“Given that China is now at the heart of many global supply chains, this will have knock-on effects around the world,” said Neil Shearing, chief economist of Capital Economics.

Christine Lagarde, president of the European Central Bank, said this week the coronavirus was adding a “new layer of uncertainty” that would weigh on the eurozone economy.

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The nightmare job for economists is to turn general statements about global interconnectedness into precise forecasts, given the uncertainty over the progression of the disease in coming weeks.

“If the epidemiologists are unsure how events will play out, then you should be sceptical of any economist that claims to know better,” said Mr Shearing.

Nonetheless, economists are finding ways to gauge the consequences.

One tool is to look at historical precedents. The 2003 SARS outbreak knocked 2 percentage points off Chinese growth in the second quarter of that year, with a rebound coming in the third quarter.

The epidemic was “estimated to have damped [Chinas] gross domestic product growth by about 1 percentage point in 2003”, according to the Ifo Institute in Germany.

Then, as now, the hit then came mostly from travel, tourism and leisure industries but it was temporary and mild, leading to practically no wider consequences outside China.

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People wearing face masks are seen on the roadside following an outbreak of the novel coronavirus in Wuhan, Hubei province, China Feb 7, 2020. (Photo: REUTERS/Stringer)

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But this benign historical precedent provides false comfort, according to Erik Nielsen, chief economist of UniCredit.

At prevailing exchange rates, Chinas economy accounted for only 4.3 per cent of global output in 2003, far below the 16.9 per cent the IMF thinks it will represent in 2020.

And noting that China was then growing at an annual rate of 10 per cent and only 6 per cent now, “we risk being too complacent by using [SARS] as benchmark”, said Mr Nielsen.

SENSITIVITY TO SHOCKS

A second useful approach is to compare the sensitivity of one countrys economic performance to shocks elsewhere.

The Ifo Institute for Economic Research, for example, calculates that each percentage point knocked off Chinas growth rate in 2020 would reduce German growth by 0.06 percentage points and, because the rest of the eurozone was much less integrated, it would be hit by only 0.01 percentage points.

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The figures appear reassuring. It is largely on the basis of similar calculations, the Chinese reduction in tariffs on US goods and a loosening of monetary policy that calm has been restored to equity markets.

But the problems with such analyses is that the direct trade linkages calculated generally do not include the knock-on consequences to corporate planning and business investment.

A Bank of England study from 2016 found that the direct effects from trade linkages of a 1 percentage point Chinese slowdown would be dwarfed by indirect confidence and financial effects.

That would mean instead of lowerinRead More – Source