The coronavirus is a big economic deal

The coronavirus is a big economic deal

There would never have been a good place or a good time for the coronavirus epidemic to occur. But it must be considered particularly unfortunate for the world economic outlook that the coronavirus should choose an economy as large as that of China as its epicenter. It is also to be greatly regretted that the virus should strike at this vulnerable stage in the world economic cycle and at a time when so many Chinese are traveling to celebrate the Chinese New Year. 

The tally of coronavirus incidents coming out of China makes nonsense of any notion that the current health scare will be but a passing phase. Already more than 6,000 cases of the virus have been reported at more than 130 fatalities in China alone. Worse yet, it seems that there is currently an accelerating daily increase in the number of people being infected, and by now the virus has traveled well beyond China’s borders to even reach our shores.

In 2003, at a time when the Chinese economy was growing by around 11 percent a year, it is estimated that the outbreak of SARS might have reduced Chinese GDP by a full 2 percentage points in the quarter in which SARS occurred. There is good reason to believe that the coronavirus could have a more pronounced impact on the Chinese economy today than the SARs outbreak did some twenty years ago.

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For a start, the Chinese economy is now growing at barely 6 percent or at its slowest rate in the past three decades. The blow being dealt to China’s economy by the coronavirus epidemic is also coming on top of those recent heavy blows that it has received from the U.S.-China trade war and from the Chinese government’s attempts to wean the economy from its addiction to rapid credit growth.

Then there is the unfortunate fact that the coronavirus is occurring at the peak holiday travel time. This has caused major disruptions to all forms of travel as the Chinese authorities have locked down cities with a combined population of around 55 million and put severe restrictions on domestic travel, including that to Hong Kong. 

Worse yet, in an effort to halt the virus’s spread, it appears that the Chinese authorities have extended the New Year vacation by a full week. It also appears that foreign workers are leaving China in droves, foreign companies are curtailing their Chinese activities and foreign airlines are halting their flights to China.

Unlike in 2003 when China’s economy was still relatively small, today China’s economy accounts for around 15 percent of the world’s GDP. As such, Chinese economic developments have a major impact on the world economy and on international commodity prices. As if to underline this point, the International Monetary Fund recently noted that largely as a result of the U.S.-China trade war and the consequent slowing in the Chinese economy, we have gone from a situation in which 75 percent of the world’s economies were experiencing economic upswings in 2018 to one in which today around 90 percent of the world’s economies are experiencing economic downturns.

The last thing that a vulnerable world economy needs now is a further marked economic slowdown in China, the world’s second largest economy. Germany and the United Kingdom now seem to be on the cusp of an economic recession, the Indian economy is experiencing a major economic slowdown and South America is being roiled by social and political unrest that is casting a dark cloud over that continent’s economic outlook. Even the United States is experiencing a manufacturing slump. 

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The main economic risk to the United States from the coronavirus shock is that it might induce lenders around the world to be more cautious in extending credit, and it might cause global investors to become very much more risk averse. That in turn could unsettle global financial markets, which could have a meaningful impact on U.S. domestic investor and consumer confidence.  

It is understandable that U.S. economic policymakers might want to downplay the economic risks associated with the coronavirus for fear of creating a self-fulfilling prophecy. But one has to hope that they are not lulled into a false sense of security by their own assurances and that they have contingency plans for dealing with a situation where the virus continues to spread at the exponential rate that it now seems to be doing.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.