UNITED STATES (OBSERVATORY NEWS) — In the days following the discovery of a new virus in China on December 31, central bank officials around the world summoned previous experience to devise a reassuring early analysis.
They indicated that the SARS epidemic in 2003 began and ended without significant economic impact.
But weeks later, this metaphor proved untrue.
The disease, which has infected nearly 75,000 people in China and nearly stops its economy, continues to spread beyond its focus.
On Thursday, the latest blow to hopes of a successful containment came when the number of confirmed cases in South Korea exceeded 100, and its first death from the disease was announced. And the streets in the fourth largest city in that country became empty, as residents remained in their homes.
And now, global officials from the financial sector are gathering in the Saudi capital, Riyadh, for the latest G20 summit, after they were overwhelmed by anxiety and after they expanded their investigation to understand the economic effects of the virus.
This is to follow coal consumption and domestic travel rates in China to obtain any independent evidence that the second largest economy in the world is returning to normal. They are keeping track of disease statistics outside China as the best indicator of prospects for containing the virus.
In Japan, officials are conducting a survey on the empty streets of the Ginza commercial district, counting the cancellation of flights and sea in an effort to find out whether the expected economic recovery later this year that they are counting on will go unheeded.
In the United States, Federal Reserve officials seek to reach out to local companies and listen to business owners who are shocked by the weaknesses of their supply networks.
“We have closely related supply chains to China that they sometimes do not know,” Federal Reserve Bank of Richmond President Thomas Parkin said in an interview on Wednesday, referring to a conversation with a medical manufacturer “who had a supplier who in turn was a supplier who was part of his business in China.”
Short illness or global recession?
Given the evolutionary and predictable nature of any viral outbreaks, analysts have no proven and reliable method of modeling an event.
The matter is clear, says policymakers and analysts: the more they talk to people, the more they become aware of China’s deep role in global supply chains. This means that the more outbreak remains out of containment, the more likely it is to become a comprehensive problem.
Among the things that cannot be known are the precise state of component stocks in companies before China begins quarantine and company closures to stem the spread of the virus, or how companies can flexibly switch to other suppliers, Parkin said.
These are issues that are not inherent in any economic model, which makes central bank officials globally strive to know about them.
The forecast experts drew perceptions centered on a limited impact, most of which is the decline in China’s growth in the first quarter. But they also add the possibility of a downturn in the global economy or, at worst, a European and American recession in light of declining global demand.
This is not the primary issue with the Federal Reserve, the European Central Bank, or the Bank of Japan, as there is still no endeavor towards policy change or interest rate cuts to mitigate an unwelcome economic shock. But policymakers acknowledge that they are going somewhat without success.
“My reading is that if everything ends quickly in the next few weeks, the damage will be slight, not a crisis,” Parkin said. If you have months, the impact will likely be greater, including ten to 15 percent of the economy, “which depends on Chinese suppliers or exports to that country.
Similar time-based assessments have been put forward in European countries and Japan, as their close ties with China make officials particularly concerned.
“The picture has completely changed from it before the outbreak,” said a Bank of Japan official, who is not authorized to speak publicly.
The risk of hierarchical implications
Economists usually view events like this with optimism. It is harmful to the economy at the present moment, but some losses last: the consumer may still be able to buy that car after a month or two, but what is lost from trips or restaurant meals is not necessarily compensated.
But in general, the inevitable return to recovery makes up for the shock.
However, some events prove to have a comprehensive impact. Policymakers and analysts point to the extent of the 2011 earthquake and flood damage to the nuclear reactor in Fukushima, Japan, which prompted global companies to rethink supply networks to make them less dependent on any specific source.
Researchers from the Federal Reserve studied in a research paper last year the consequences of a “sharp fall” in China – meaning a mixture of financial pressures and a sharp decline in gross domestic product – on the US and global economies.
The results were not promising.
The research predicts “hierarchical implications for the US economy and the global economy through real trade links and financial channels alike.”
US officials say it is generally accepted that the decline of China’s growth by one percentage point cuts 0.2 percentage points of US GDP – It is a notable measure, but it is unlikely to cause a recession unless the shock is massive.
From the perspective of Europe, the time for concern is not yet ripe – but it should be kept watch.
“History indicates that there may be a significant impact in the short term of events like these, but it will not have a long-term impact … this is the baseline,” said European Central Bank chief economist Philippe Lin in Berlin. Let’s see – it depends on how quickly it contains. ”
This article is written and prepared by our foreign editors writing for OBSERVATORY NEWS from different countries around the world – material edited and published by OBSERVATORY staff in our newsroom.
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