The coronavirus epidemic could be more damaging to the global economy than the SARS outbreak in 2003, IHS Markit’s February “Global Economic Forecast Flash” report contends.
During the 2003 SARS epidemic, China was the sixth-largest economy, accounting for only 4.3 percent of world gross domestic product (GDP), according to the report from IHS chief economist Nariman Behravesh, and Sara Johnson, executive director of global economics. Now, China is the world’s second-largest economy, accounting for 16.5 percent of world GDP last year.
“If the unprecedented confinement measures in China stay in place until the end of February, the resulting economic impact will be concentrated in the first half of 2020, with a reduction in global real GDP of 0.8 percent in the first quarter and 0.5 percent in the second quarter,” Behravesh and Johnson wrote. “In this scenario, the coronavirus and resulting measures will reduce global real GDP growth by 0.4 percent in 2020.”
However, they noted that if the confinement measures to contain the coronavirus, officially known as COVID-19, are quickly lifted, as is IHS Markit’s current operating base, the impact on global GDP will be more limited, resulting in a 0.1 percent reduction in global GDP growth in 2020.
The economists forecast that damage to the Chinese economy from the coronavirus “will be intense, but probably short-lived.” The Chinese government’s response this time has been much faster, having learned from the earlier episode, the pair said, comparing the two epidemics.
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In a severe coronavirus scenario lasting through the end of February, China’s growth would be cut by about 1.5 percent, the report said. In a quickly contained scenario, which is IHS’s current forecast, the hit to growth would be around 0.4 percent.
“The impact on the rest of Asia would be much bigger than on other emerging regions,” Behravesh and Johnson said. “The 2003 SARS crisis also hit the economies of Southeast Asian markets, including Australia, Malaysia, Singapore and Vietnam. Since 2003, aside from its growing importance to global supply chains, China’s international tourism has boomed. Popular Asian tourist destinations such as Thailand, Vietnam, Japan, Singapore, and South Korea are especially vulnerable.”
Sectors of the economy that have already been hit hard include retail, restaurants, conferences, sporting events, tourism and commercial aviation. IHS Markit estimates that in a severe scenario, growth in the rest of Asia would be cut 0.8 percent. In a limited crisis, growth would only diminish 0.1 percent.
“The coronavirus-induced slowdown in China and the rest of Asia should be sharp, but short,” the economists said. “Elsewhere, the impacts will probably be small.”
The big elsewhere is the U.S., where IHS forecasts steady growth, despite the global risks. The report noted that fourth-quarter real GDP growth was reported at a 2.1 percent annual rate in the advance estimate. Unexpected weakness in consumer spending and somewhat less momentum heading into the first quarter of 2020 compound the risks and uncertainty.
“Inventory investment was lower than anticipated in the fourth quarter, but restocking will lead to a stronger contribution to GDP growth in 2020,” the economists said. “Factoring in other developments, we edged up our forecast of 2020 GDP growth and edged down our forecast of 2021 growth. The coronavirus epidemic is not likely to have a measurable impact on U.S. growth, a view reinforced by the recent snapback in U.S. equity markets.”
In Europe, weak but relatively steady economic conditions are seen. Real GDP increased just 0.1 percent quarter on quarter in the final quarter of 2019, its weakest performance since the first quarter of 2013, while full-year growth was 1.2 percent in 2019, down from 1.9 percent in 2018, the report stated.
“Eurozone real GDP should accelerate during 2020, supported by somewhat stronger exports and solid private consumption growth,” Johnson and Behravesh said. “Yet, the low starting point limits annual growth in 2020 to just 0.9 percent.”
Political uncertainty in several countries such as Germany, Ireland and Italy has risen recently, while the U.K. economy stalled in the fourth quarter, as growth in services and construction was offset by contraction in manufacturing, the report said.
“Brexit fears could continue to hurt investment in 2020–21, with U.K. firms now focusing on the risks of a rushed, bare-bones free-trade deal that brings new nontariff barriers and custom checks,” the economists said. “Consequently, U.K. real GDP is projected to increase only 0.7 percent this year.”
In Japan, the effects of the coronavirus will be negative, but small, IHS said. Japan’s economy should resume growth in the first quarter of 2020, thanks to pent-up consumer demand and government stimulus.
“The coronavirus impact on tourism in Japan will be larger than that of the SARS epidemic, given that the number of visitors from China in 2019 was more than 20 times that of 2003,” the economists added. “Furthermore, the shutdown of Chinese factories, if prolonged, could delay the recovery in Japan’s exports.”