WILL CRISIS SPARK RECESSION?
As world’s second largest economy is locked down by coronavirus, our City Editor asks...
AS IF the public health impact of the coronavirus outbreak is not scary enough, the economic fallout from the disease could be just as contagious — and dangerous.
The close-down of commerce in large parts of China threatens not just the output of the second largest economy on the planet but the whole world. The interwoven nature of global trade means that the business and economic consequences of the disease could move rapidly from the Asia-Pacific region, infecting the U.S. and an already stagnating European economy.
The danger for Britain is that the economic mayhem unleashed by the coronavirus outbreak could wipe out the ‘Boris bounce’.
Since the December 12 General Election, business and manufacturing confidence has risen, the housing market across the nation has staged a remarkable recovery and public finances have improved.
The Government looked set to open its thorny trade talks with the EU on an optimistic note. But Brexit could now look like a picnic compared to the economic danger blowing in fast from the East.
Much of what Britain consumes — from laptops to kettles, from suitcases to fashion — is made in China and shipped to the UK. Last year the UK’s trade with Beijing hit £44.7 billion, of which £22.6 billion was exports to the Land of the Dragon.
But as China locks down in the face of this unprecedented virus, the list of British firms hit grows longer by the day. The suspension of British Airways flights to China’s major cities saw the shares of the group’s owner IAG plummet 4.7 per cent last week.
BRITISH luxury goods company Burberry — already adversely affected by the unrest in Hong Kong — is among the growing list of companies shutting up shop not just in Wuhan but across the entire country.
Some of the biggest international brands including Starbucks, McDonald’s and the Swedish fashion firm H&M are also drawing in their horns.
Starbucks, for example, has closed 2,000 restaurants across China. McDonald’s has closed all its restaurants in Hubei province where the outbreak started. H&M has closed nearly 100 shops in China. Ikea, the Swedish furniture maker has closed all of its stores there. The electric car maker Tesla has shut its factory in the country while the virus has caused General Motors, Honda and nissan to suspend production.
Google’s parent company Alphabet, meanwhile, is shutting all its offices in China, Hong Kong and Taiwan and has restricted its employees from flying to mainland China and Hong Kong.
The staggering scale of the danger to global business was reflected on Wall Street on Friday. As Britain marked the departure from Europe with parties and gongs, the Dow Jones Industrial Average, the key measure of investor confidence, plummeted a startling 600 points. Chaos can be expected when markets open today.
One way we have of assessing the potential impact of the coronavirus on the global economy is to look back to 2003 and the SARS epidemic, which also emerged from China. At the time that knocked two full percentage points off China’s economic growth.
Back then, China accounted for 4.3 per cent of global output. Today, in spite of the current trade war with the U.S., which has put a dampener on Chinese and world growth, it accounts for a whopping 16.9 per cent of output.
In other words, if the spread of the coronavirus does not peak soon, the impact on global expansion could be four times worse than it was with the SARS epidemic.
When the International Monetary Fund revised its economic forecast for the world at Davos economic forum in Switzerland last month it lowered its estimates for prospective world growth for 2020 to 3.3 per cent. That number is starting to look decidedly upbeat. Chinese expansion, currently estimated at 6 per cent, could tumble.
new forecasts from Oxford Economics suggest a severe impact from coronavirus. The UK-based forecaster says that with many regions and cities locked down until at least February 9, there will doubtless be disruption.
Given that the affected areas account for 50 per cent of all of China’s enormous output, the forecaster fears that growth could fall to 4 per cent in the first quarter. An even more gloomy forecast is made by the City-based firm Cebr, which specialises in long-term economic trends. Based on the evidence from the SARS outbreak, it reckons a prolonged shutdown caused by the coronavirus could cause global output to shrink by between 1.8 per cent and 6 per cent.
If that were to happen, the world would be plunged into the doldrums, if not a full recession. It would be the first such global downturn since 2008-09, when the full impact of the financial crisis was felt across the Western democracies.
The dark cloud hovering over China comes at a particularly awkward moment for the UK Government. Last week the national Security Council defied the U.S. and awarded the Chinese telecoms equipment maker Huawei up to 35 per cent of the work in building the UK’s ultra-fast 5G mobile network infrastructure.
Britain is also looking to a Chinese firm to rescue the ailing British Steel works at Scunthorpe in the face of opposition from France.
Already, China is a big investor in the UK’s new nuclear reactor at Hinkley Point in Somerset, as well as in Thames Water.
If nothing else, the mishandling of sensitive data relating to the coronavirus — experts at Imperial College London suggest the true number infected could be dramatically higher than the official one — demonstrates some of the political risks in giving the autocracy in Beijing such a dominant role in the British strategic industries.
THE threat to the world’s economy is now so grave that if the coronavirus emergency shows no sign of subsiding in the next week or so, global economic policy makers may have to consider special measures in the hope of keeping global recession and soaring unemployment levels at bay.
Taking early action will be seen as particularly important for the White House as the presidential election season kicks off in the Iowa caucuses in the U.S.
The simplest way of supporting a slowing global economy is to cut interest rates. And both the U.S. and the UK have room to cut rates in an impending crisis. Last week the Bank of England chose to hold the bank rate at 0.75 per cent. That decision may now have to be reversed, which could be embarrassing for governor Mark Carney in his last full month in office.
In the U. S., President Trump could be expected to renew his war of words with America’s central bank, the Federal Reserve, which has resisted further interest cuts. Closer to home the European Central Bank has virtually no scope to lower interest rates — already at rock bottom — and might have to print more euros to head off recession.
The disease outbreak could also make choices harder for Chancellor Sajid Javid. He will have to weigh the risk of big spending on investment in infrastructure against a worsening budget deficit should a global slowdown loom. One simple way of holding off recession would be tax cuts, in addition to those in the manifesto, to stimulate spending and growth.
But the truth is there are no easy answers when China, the country that has become a key factor in our own — and the world’s — economy is in lockdown.
The source of disease in Wuhan may be on the other side of the planet. But in today’s interconnected world it has the power to damage the prosperity and wellbeing of countries, businesses and peoples across the globe.