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Bruno Cavalier
Chief Economist at ODDO BHF

The coronavirus is a negative demand shock (Chinese consumers have been confined to their homes), which is likely to result in a sharp fall in GDP growth in Q1, especially in Asia, followed by a strong rebound in the next six months. This is the most common assumption and in our view the most reasonable. The shock also disrupts supply. As China plays a key role in the global value chain, it is to be feared that global industry might suffer, just as the sector seemed to be on the mend. How long the shock will last is highly uncertain. Stimulus measures could facilitate the recovery but will not undo the shock.

The coronavirus, worse than tariffs

In the last two weeks, the attention of the world has focused on the viral outbreak that began in China at the end of 2019 and which is still spreading at a dizzying pace¹ . The containment measures implemented by the Chinese government are paralysing part of the economy. Several countries have stopped or reduced their links with China, increasing its isolation. The coronavirus is first and foremost a public health issue, but it is also an economic problem. The outbreak came at a particular time for two reasons. First, the containment measures were introduced just as the Chinese were preparing to celebrate the New Year, a time of reduced economic activity and frenzied travel and spending. Production sites will not be able to reopen as planned and some spending will be cancelled or postponed. Second, this public health shock comes as uncertainty relating to the US-China trade war was receding after a preliminary agreement was signed on 15 January 2020. The relief reflected in recent business confidence surveys could prove short-lived.

➢ China in the global economy – It is a truism to say that China has undergone an extraordinary transformation in the last two decades since it joined the WTO. The figures are worth noting, however. China today accounts for around 18% of global manufactured product exports and 16% of global GDP (chart lhs). These percentages were in the region of 5% in 2003 when the SARS epidemic occurred, which is often used as a reference point for the current epidemic. In the past decade, China’s growth has slowed (6% in 2019) but, due to its growing weight, its contribution to global growth remains stable at around one-third (chart rhs).

¹ The first coronavirus case was declared in China on 31 December 2019. The virus was identified on 7 January 2020. On 20 January, Chine reported a sharp increase in the number of people infected. Since then, the WHO has monitored the epidemic daily (https://www.who.int/health-topics/coronavirus). On 30 January, the WHO declared a public health emergency of international concern (PHEIC). At 6 February, the number of cases officially reported stood at over 28,000 (99.2% in China), and the number of deaths at 565 (99.8% in China).

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