Chinese lockdown may not prevent coronavirus infecting global economy
WHEN I first started to read headlines and articles about the Wuhan coronavirus, it was January 24. By that stage, the number of confirmed cases was 830 and sadly, 26 people had lost their lives. It was alarming to read about the aggressive symptoms of the virus and the high mortality rate, but what also struck me was that it was taking place in a city that I had never heard of, and that city, Wuhan, has a population of 11 million people.
The province of Hubei, which includes Wuhan and several other large cities, is now in total lockdown: shops, restaurants, public transport, everything is shut down.
Streets are being sprayed with disinfectant on a daily basis and very tight restrictions have been imposed on when residents can restock their food and water.
It is difficult to grasp the magnitude of all of this. Hubei is massive, about the size of the Netherlands, with a population of 58 million people.
Beyond Hubei and across China, efforts to contain the virus include mass business closures, significant travel restrictions and quarantining.
Thousands of visitors to China, who have now returned to their native countries, face two weeks in quarantine. Despite all these containment efforts, the human cost will continue to rise, until successful anti-viral treatments can be developed. The economic cost will rise too, not just in China, but across the globe.
Over the past two decades, China’s economic growth has been unparalleled. At an average pace of 9pc GDP growth per year, it has risen rapidly from virtual obscurity to become an economic super-power, second only to the US.
In fact, in many regards, China has become more important to the global economy than the US. It is by far the largest consumer of raw materials and industrial metals, and it also accounts for 13.5pc of global exports, well ahead of the US on 9pc.
China is effectively the engine room of manufacturing and industrial production for the APAC (Asia Pacific) region and beyond.
It is deeply embedded in critical supply chains across the entire globe and, for as long as it is crippled by the coronavirus, the economic toll will intensify.
During the SARS virus, back in 2003, it is estimated that 1pc was knocked off Chinese GDP, the fallout across the APAC region cost approximately 0.5pc of GDP and, beyond that, the economic impact was minimal. But with this disaster, there are stark differences. The spread of this virus is more aggressive, containment efforts are more rigorous and the Chinese economy is over eight times the size it was during SARS.
In short, while it is impossible to estimate the global economic impact of this outbreak, it is likely to significantly exceed the fallout from SARS.
Back in 2003, China’s production chain was rudimentary in comparison to today. The list of companies impacted this time around is endless and it’s full of household names, such as Apple, Toyota, BA, Walmart and Ikea. Of course, there are several Irish companies that will be hit too.
They will include exporters of dairy, meat and seafood, as well as the growing list of companies that rely on the production lines scattered around China.
At the beginning of the year, the IMF forecast global growth of 3.3pc for 2020, but already that figure looks optimistic. China accounts for over 16pc of that number, so if 2-3pc is knocked off the 6pc initially expected for Chinese growth this year, the projected global growth numbers quickly drop back to around 3pc. Take another 0.2pc to 0.4pc off that, to account for the economic fallout beyond China, and 2020 could be the worst year for global growth since 2009.
But that may prove pessimistic, depending on the reaction of fiscal and monetary authorities. Earlier in the week, the People’s Bank of China cut short-term funding rates and announced a $174bn (€158bn) liquidity injection to limit the market fallout of the virus. If financial conditions fail to stabilise, follow-up measures are likely, not just in China, but in other economic regions.
Of course, it will be a long time before the full economic cost of the virus can be estimated, but financial markets are already telling us where the pain is most likely to be felt.
As you’d expect, global commodity and Asian equity markets have been hit hardest, with oil down 13pc, iron ore down 10pc and the Chinese stock market down almost 6pc.
Hundreds of lives have been lost and now millions of livelihoods are at risk, so the race is on, both to contain the spread of the virus and to develop anti-viral treatments. On this front, at least, there may be some cause for optimism.
In recent days, the alarming rise in the number of infected cases has slowed, and some reports have suggested that existing anti-viral drugs may be effective in treating the symptoms of the coronavirus. The most promising lead perhaps is Remdesivir, a broad-spectrum anti-viral, developed as a treatment for ebola.
I can only hope that by the time you’re reading this article, medical experts will have made the necessary breakthrough to manage, contain and ultimately eliminate this deadly virus.