On Friday (31 Jan), Allianz Research released a report that gives a summary of the economic outlook due to the viral outbreak, which also includes its impact on markets, sectors, assets, China’s growth, and the global supply chain alongside the policies implemented by China.
The report also shows that the official purchasing managers’ index (PMI), which captures the dominant direction of economic trends in the services and manufacturing sectors, fails to reflect the significance of the economic concerns caused by the viral outbreak in China.
ECONOMIC OUTLOOK
The non-manufacturing PMI increased to 54.1 from 53.5 whereas the manufacturing PMI declined to 50 from 50.2 in December 2019. These figures capture some resilience based on a result of the survey cut-off on 20 January as the outbreak started garnering public attention.
The report expects surveys in February to capture more accurately the economic effect of the outbreak. On Monday, 3 February, the current state of local sentiments could be captured as the Chinese onshore market opened. It is predicted that the Coronavirus will have non-negligible impact not just on the Chinese economy, but also globally.
CORONAVIRUS NOW A GLOBAL PUBLIC HEALTH EMERGENCY
According to the WHO on 30 Jan, the coronavirus 2019-nCoV has now become a global public health emergency. The viral outbreak, which surfaced in China in December last year has now garnered strong public attention from the middle of January 2020.
Based on recent reports, there have been approximately 210 casualties and 9,800 confirmed cases. As of now, the Chinese authorities have taken containment measures to curb the epidemic mainly at the domestic level with 98.5 per cent of the cases confined to mainland China.
IMPACT ON MARKETS, SECTORS & ASSETS
The responses by the markets towards the epidemic have been strong, according to the report. The accommodative stance adopted by central banks is still not enough to pacify the markets. Equity markets have been showing declining trends. For example, China, MSCI World and APAC indices have declined by 8.5 per cent, 1.8 per cent and 4.7 per cent each from 20 Jan onwards.
Sectors that are most vulnerable to the viral outbreak are being impacted, such as hotels, restaurants & leisure, airlines and textiles apparel & luxury goods which saw the MSCI World Index fall by 4.7 per cent, 6.9 per cent and 6.4 per cent each since 20 Jan.
On the other hand, the report states that safe assets have performed relatively well at this juncture. For example the US 10-year treasury yield fell by 25 basis-point (bp) while the JPY appreciated by 1.1 per cent against the USD. Also, the markets are beginning to price in lower growth in China as shown by the CNH depreciating by 1.7 per cent against the USD. When a turning point appears in the spread of the virus, only then will caution disappear.
IMPACT ON CHINA’S GROWTH
China’s year-on-year GDP may slow down by up c.1pp mainly during Q1 of this year. From Q1 onwards, recovery should be underway as backlog policy support and production commences once more. Although it is difficult to predict the overall economic impact right now, it will depend on the duration and severity of the outbreak.
The unprecedented containment measures adopted by the Chinese authorities, coupled with the direct impact of the epidemic itself, do suggest that economic activity may be impacted by a bigger margin than predicted.
The demand and supply sides are adversely affected by delayed production due to the extended Chinese New Year holidays as well as the “fear factor” which dampened consumer spending.
China’s growth decelerated due to the SARS outbreak in 2003, causing a 2pp fall in GDP year-on-year growth from 11.1 per cent in Q1 to 9.1 per cent in Q2. Holding other factors constant, the persisting epidemic may bring bigger impact because the Chinese economy is highly dependent on private consumption in 2019 at 50 per cent compared to 28 per cent in 2003.
POLICIES BY CHINESE AUTHORITIES
Nonetheless, the report states that the Chinese authorities have been acting swiftly against the outbreak and this could mean that, similar to the SARS outbreak, the slowdown in growth is expected to pick up within two quarters.
Throughout the viral ordeal, policy support is likely to increase. Some of the already implemented measures include the increase in liquidity injections by the People’s Bank of China, and better credit conditions being offered by large state-owned banks to companies affected by the outbreak.
In addition to this, monetary easing may also enter the picture. The report forecasts a 30bp slash in the loan prime rate and 150bp slash in the reserve requirement ratios throughout 2020. These figures were deemed unlikely before, but now they are quite probable.
On the flip side, fiscal policy may be more expansionary as public spending is increased over the 2.7 per cent of GDP that is expected this year. Both fiscal and monetary policies adjusted this way may override some of the contractionary effects of the viral outbreak, but not fully.
RIPPLING EFFECTS FROM CHINA
If China’s economic activity is disrupted, this could also disrupt supply chains such as textile & electronics, chemicals and transport equipment. The most important industries in the Hubei province in terms of gross industrial output are non-metallic products and chemicals at 22 per cent, and transport equipment at 18 per cent.
According to the report, 9 per cent of total motor vehicles production in China is accounted for by Hubei province. Due to the fact that the whole economy is highly connected with the car industry, most industrial activities might be adversely affected.
Since the Chinese economy is an integral link in the global supply chain, other countries will also likely feel the adverse impact. Computers & electronic and textile sectors are especially exposed to China because these sectors account for 17 per cent and 19 per cent of world production. Also, shortages are possible because inventory levels are low in the electronics industry.
Of the economies of the world, the five countries most dependent on China in terms of the utilisation of Chinese inputs are Taiwan at 5 per cent, South Korea at 4 per cent, the Netherlands at 3 per cent, Hungary at 3 per cent and Indonesia at 3 per cent.