Covid-19 expected to induce massive Asian stimulus
Since the first reported case of the coronavirus Covid-19 in Wuhan, China, on December 31 2019, the death toll has increased to more than 2,700 in China alone and has since spread to more than 25 countries.
New confirmed cases continue to rise, but at a declining pace in China and an accelerating pace beyond. While the epidemiological path of the virus remains uncertain, the economic effect is starting to show up in the disruption of global value chains.
Many analysts have incorrectly likened the event to the 2002-2003 severe acute respiratory syndrome (SARS) outbreak and, more recently, to the Saudi Arabia oil refinery bombing and the killing of Iranian army Gen Qassem
Soleimani. In those cases the effect was transitory, localised and solutions were quickly found. But this time, with Covid19, it is different.
A disclaimer upfront: as economists we are well trained in the analysis of how the economy works and how one aspect of the economy affects other aspects. But we are poorly trained in analysing the spread of diseases and their effect on population dynamics. So there is uncertainty over how big the impact of the coronavirus will be on economic growth and on markets.
The various estimates emanating from economists and market pundits are at best guesstimates based on the 2002-2003 outbreak of SARS, which killed 774 people worldwide. The economic consequences of the SARS outbreak were smaller than expected and mostly confined to China. Economic growth there slowed to 9.1% in 2003 from just over 10% in 2002. The global health impact was contained quickly and did not spark quarantines or widespread public fear.
Nearly 20 years later, the coronavirus’outbreak when China s economy happens is transformed and integrated into global high-value manufacturing and services value chains. China’s GDP is more than 10 times bigger than it was in 2002. Its linkages are widespread to developed and developing economies. It has never been as true to state that when China coughs, the whole world sneezes.
Initially, the Covid-19 outbreak was expected to affect only the supply side of the economy as factories in China closed. However, quarantines and restrictions on people’s movements affect the demand side. More so the second-round effect of factory closures, in that companies will at some point stop paying people if they remain non-operational, which will have a further effect on the demand side. The problems are therefore on both the demand and supply sides.
The response of the Chinese authorities has been aggressive. Building a new 1,000-bed hospital from scratch in 10 days and quarantining a city of 11million people by stopping public transport indicates the seriousness with which the authorities are treating the outbreak. There have long been suspicions that Chinese statistics are doctored. Could this be the case with coronavirus stats?
Can central banks or fiscal policy help? Monetary or fiscal stimulus is likely to prove limited as long as the movement of people and goods remains restricted. Fiscal policy can help through more spending on health-related issues, which should result in a relaxation of restrictions on movement eventually. Only then can monetary policy come to the party in a useful way.
That said, from a market perspective we are likely to see the biggest co-ordinated stimulus in many years out of Asia as countries respond to the coronavirus. This will once again boost financial markets. But the risk is that the spread of the coronavirus will go on for longer than expected, in which case markets are likely to fall to take into account the weak underlying economy.