US, WASHINGTON (NEWS OBSERVATORY) — This quarter, the Covid-19 virus will cost the world economy about $ 1 trillion in annual production volumes, most of which are in China. Can we say that Beijing will face a recession or worse?
It is impossible to say how serious the Covid-19 pandemic will become. Similar events – SARS in 2002, deadly flu in 2009 and MERS in 2012 – were faster than anticipated, allowing markets and economies to recover quickly. It is tempting to take them as an example, with which you can predict the outcome of today’s problems. But the best that such examples can help is to give only a general idea of how future events will develop.
This virus can behave in a completely different way. The longer it lasts and the more people kill, the worse the economic effect will be. Even without taking into account future pains and losses, Covid-19 has already left a heavy imprint on the global economy.
This disease began in China, and it was here that economic losses were felt most strongly. However, economic problems captured the rest of the world faster than the virus itself. Losses in the Chinese economy have caused economic damage in other parts of Asia, Europe and North America. Exports to China were declining everywhere, China’s economic deficit interrupted supply flows, firms that at first glance were not related to Chinese trade had difficulty meeting production schedules.
This quarter there may be a clear recession in several economies, including China.
The quarantine imposed by Beijing and the workers’ fears of traveling to where they might become infected led to the closure of a significant part of this country’s production. The Caixin / Markit Manufacturing PMI index fell more than 20% in February, from 51.1 to 40.3. The production index fell in February to a record low of 35.7. The suddenness of this fall is due only to the Covid-19 virus.
Along with this bad news, companies are reporting an 8% decline in car sales in China compared to last year and a 7% decline in mobile phone purchases. Long-distance passenger traffic decreased by 40%. A recent survey by the Chinese Academy of Social Sciences (CASS) showed that just under half of Chinese enterprises are expecting losses this year.
Due to the dubious nature of official statistics in China, it is difficult to really assess the total damage. Some sources note a 10% annual real decline in China’s economic activity in the first quarter of 2020. Perhaps this figure is exaggerated, but an economic downturn is possible. Official statistics, always in an optimistic position, show that real growth last year was 6.1%, quickly by the standards of most countries, but slower than the growth of China’s economy over 30 years.
However, unofficial data paint a sadder picture. Some Chinese experts believe that the real growth rate in the country is approaching 3-3.5 %%. Based on this, it is easy to predict a real economic downturn in response to the spread of coronavirus. Hubei Province, where the disease began, remains closed.
Since it accounts for about 4% of China’s GDP, losses alone can lead to a recession in the economy. Even if you take into account the official growth rate for the past year, the loss of Hubei will lead to the fact that China’s growth rate will be even slower than last year in the United States. As can be seen from the above figures, China’s economic burden goes far beyond Hubei.
Losses from coronavirus will affect not only China. The once-large flow of Chinese tourists to America, Europe and other Asian countries has dried up: Beijing does not let them out, and the United States and other countries, fearing infection, will not dare to let tourists from China. Last year, Chinese tourism in the United States, which already suffered from the raging trade war at that time, nevertheless brought $ 20.1 billion to the economy of this country.
This is 0.1% of America’s GDP, but it almost completely dried up in the first quarter of 2020. Other countries suffered significantly more. Chinese tourism typically accounts for about 0.5% of the EU’s GDP, including the UK, 0.8% of Japan’s GDP and a whopping 1% of South Korea’s GDP. These streams have also dried. These losses alone are enough to put into slow-growing economies decline.
Losses do not end on tourism. After all, China accounts for one third of all world trade. It absorbed 24% of South Korea’s exports, except for tourism, mainly in electronics, machinery and chemicals. At least before these economic problems began. About 20% of Japanese exports usually go to China and the same share of exports from the EU (including the UK), Vietnam and Canada. China receives only 8% of US exports, a rather significant indicator, although it is less dependent on this market than other countries.
Losses of this business or its significant part can easily bring down some economies in the first quarter of the year. Even the United States, which grew by 2% in real terms last year, is unlikely to offset lost export sales. South Korea also grew by about 2%, but sales losses may be up to three times larger due to the loss of exports to China. Meanwhile, in real terms, the EU grew by only 1.5%, and Japan – by another 1%, that is, the export deficit in addition to tourism losses can easily create a negative indicator of real growth in the current quarter.
As manufacturers around the world produce raw materials and spare parts, the situation in China has cut off supply chains everywhere and thus stopped production around the world. According to OECD statistics, Europe usually receives approximately 10-15 %% of its production resources from China and Canada with a similar percentage.
Russia and India look more vulnerable, usually importing about 20-25 %% of their materials and parts from China. And the United States looks the most vulnerable on this scale. Last year, manufacturers in this country imported over 25% of their materials and parts from China.
A few current statistics give an idea of the extent of this violation. The port of Long Beach, California, the main port for Chinese goods, reports a 40% drop in container traffic. Observers in China note that containers are docked at important ports in Tianjin and Ningbo. Chinese ports, as a rule, warn of a four-month delay in container shipping to the United States.
The auto workers union recently suggested that a shortage of Chinese parts would soon lead to the closure of General Motor factories. Pharmaceutical firms have noted that a shortage of Chinese ingredients will affect the production of 150 prescription drugs. The G-20 group of countries summarized all of these effects of coronavirus, deciding that the cost of an outbreak would cost the world economy $ 1 trillion this quarter alone.
If the influence of the coronavirus ceases relatively quickly, as was the case with SARS and MERS, economies and financial markets will recover. The situation with the spring quarter will look better, global economies will return to their previous growth indicators in the last quarter of the year. China looks forward to this in the future. A quick rebound is needed to escape from the recession and because last year’s trade war created the conditions under which a departure from sources in the Chinese economy began.
So that China can immediately respond to any rebound, Beijing has already reduced taxes on small businesses and instructed its three state-owned banks to increase lending at a special low rate for small businesses. If the virus begins to decline, these steps will help accelerate the recovery that China needs and stop the diversification of funding sources.
No Beijing efforts will matter if the Covid-19 virus continues to spread. In this case, economic losses will double. Without a doubt, the Fed and the ECB will lower rates and flood markets with liquidity in an attempt to offset economic setbacks.
The Fed almost promised it. But monetary policy has proven less powerful than ever when it comes to promoting economic growth. This will prove even less effective in the face of the limitations of the current situation.
A gloomy economic picture is emerging for the global economy and for China if this emergency continues.
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Article is written and prepared by our foreign editors from different countries around the world – material edited and published by News Observatory staff in our US newsroom.