What to expect after the Coronavirus Outbreak
Though it is early to forecast the magnitude of the impact of the
Coronavirus in China’s economy, historical data demonstrates the
ability of this country to rebound and emerge relatively well from
previous challenges. Thanks to the significant investments made in
China the past two years to enhance its infrastructure and secure
supplies, it is likely that any shortfalls caused by the virus outbreak
could be made up by the trade agreements and improvements that will be put into effect in this coming year.
The new coronavirus, officially named COVID-19, is often compared to the “Severe Acute Respiratory Syndrome” or SARS, which began affecting Guangdong Province in November 2002; however, it wasn’t until February 2003 that it had been identified and China had admitted there was a national problem.
Despite that the two diseases come from the same large family of viruses that usually infects animals but can sometimes evolve and spread to humans, epidemiologists and economists alike have struggled to put numbers or context around this new health crisis, given China’s larger role in the world economy, and COVID-19’s far more rapid spread.
Many lessons were learned in the 17 years since the SARS outbreak. China’s government has taken more drastic measures this time to contain the new coronavirus, which has infected and killed more people than SARS did. That’s one reason why an increasing number of economists have forecast a larger hit to the Chinese and global economy.
While the coronavirus situation is still unfolding, mathematical modelling suggests infection figures will peak in the latter part of February and then decline during March, at which point factories are expected to be back into production. As it happened with SARS, some pockets of infection may persist for several months.
Disruptions in economic activity during the SARS outbreak dragged down China’s growth from 11.1% year over year in the first quarter of 2003 to 9.1% in the following three months, according to data from the National Bureau of Statistics of China.
China’s economy, at that time the sixth largest in the world, rebounded in the subsequent quarters to register an annual growth rate of 10% — quicker than the previous year’s 9.1%, sparking economic concerns of an overheating, rather than damaged economy. But various estimates showed that China’s annual growth in 2003 could have been 0.5 to 1 percentage points higher without disruptions from SARS.
This time, several economists estimated that the new coronavirus will mostly hit China’s first-quarter growth. Some banks and research houses have slashed their forecasts for China’s full-year growth by 0.2 to 0.7 percentage points — to as low as 5% in 2020.
Although China had been unprepared for SARS, a lot was learned back in those days that is extremely useful in handling today’s coronavirus outbreak, not least prompt liaison with the World Health Organization, which was lacking in 2002-03. SARS didn’t completely clear up until July 2003, eight months after it had originally surfaced.
Li Deshui, then Director of China’s National Bureau of Statistics, calculated that China had in 2003 become a significant global consumer of raw materials, taking in 30 percent of the world’s coal production, 36 percent of the world’s steel, and 55 percent of the world’s cement, and acknowledged that prices for steel and cement were on the rise and that inflation could be a concern. Meanwhile, 12 months after SARS, China’s GDP grew by 9.4 percent.
The drag on China’s industrial production from the new coronavirus could be more severe, some analysts said. That’s because factories in multiple major Chinese cities have remained shut as authorities rush to contain the virus.
Economists from French bank Societe Generale said they expect the coronavirus “to be brought under control” in the later part of the first quarter, which would allow industrial companies to “raise capacities to meet orders.” But they warned that the situation in China may not improve as expected.
The retail sector in China was among the worst hit by the SARS epidemic. Growth in retail sales moderated to 4.3% in May 2003 — the slowest pace on record, according to Refinitiv. Analysts have said that retail is once again likely to suffer the most from the spread of the new coronavirus, especially after the Chinese government locked down cities and restricted travel within the country.
There are growing concerns around the effect of the health crisis on consumer morale. Beyond the physical barriers, fears centered on crowded places are unlikely to create the sort of positive emotional and psychological background that make people inclined to shop.
But as with the SARS experience, economists expect that retail sales in China bounce back after the new coronavirus is contained. That’s when consumers would go ahead with the spending that was held back by the virus outbreak, some analysts said.
In 2019, China’s consumer confidence figures were at a ten-year high. The coronavirus outbreak will put an initial dent in that, but the fundamentals may not change much. In fact, there is likely to be some pent-up demand once the situation is over, and a release of positive emotions. China has also been putting in place infrastructure to allow the digital processing of goods purchased and delivery, both, to consumers in China and those overseas.
A lot has changed in China’s economy since 2003. However, in 2019 the Chinese economy reached US$14.3 trillion and registered a growth rate of 6.5 percent. China has become an exporter of finance, providing US$500 billion for its Belt and Road Initiative infrastructure projects alone.
China has also just concluded the US-China Trade War, and tariffs on products have in many cases been relaxed from the position they were in a year ago. However, overall the situation remains the same as last year. A virus has replaced the US-China trade war as the new economic challenger.
Many infrastructure developments, along with free trade investments will kick in during 2020. Many of the Belt and Road projects either are or shortly will be completed, providing the infrastructure required to keep China’s imports and exports on track, and in many cases, enhancing them.
China is in the process of creating six free trade zones on its borders and setting up 24 e-commerce zones. It has also established enhanced freight traffic facilities in numerous places, including the EU, Russia, Latin America, and Africa. On top of that, there is an improved China-ASEAN Free Trade Agreement and the upcoming tariff conclusions to the China-EAEU FTA, which when it happens will spur a US$100 billion in additional bilateral trade between China and Russia. It is also possible that the Phase Two US-China Trade deal could include a US-China Bilateral Investment Treaty.
There is still a long way to go, but international investors see this as a temporary situation and expect China to recover from the coronavirus sooner rather than later.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.