Coronavirus Eclipses Trade as Global Economy’s Biggest Threat

But as U.S. President Donald Trump and Chinese Vice Premier Liu He were holding up signed copies of their accord for the world’s media, more and more people in the central Chinese city of Wuhan were coming down with a new pneumonia-like virus.

Now, less than three weeks after the Jan. 15 signing ceremony, more than 200 people are dead, thousands infected, and a global health emergency has been declared, leaving the outlook for the world economy in the hands of the brave biohazard-clad health workers scrambling to contain the virus’s spread.

Initial efforts were complicated by the onset of the Lunar New Year, China’s equivalent to Thanksgiving or Christmas, when families reunite for a week of feasting, shopping, and moviegoing. The holiday started on Jan. 24, just as the severity of the outbreak was becoming clear.

Wuhan, a crucial transport, steel, and auto manufacturing hub with 11 million people, was locked down and its buses, trains, and airports shuttered. But an estimated 5 million people left during the holiday, some of them carrying the virus with them to nearby towns, bigger cities, and around the world.

Since then, more areas have been locked down and the holiday has been extended for an additional week in 14 provinces. They include export powerhouses Guangdong, which includes the tech city Shenzhen; Shanghai, home to China’s largest port and a newly built Tesla Inc. plant; and Jiangsu, where Nike shoes are manufactured. The provinces accounted for almost 69% of China’s gross domestic product in 2019, according to Bloomberg calculations.

Companies such as Starbucks Corp. and McDonald’s Corp. have closed stores. Toyota Motor Corp. and many others have halted production. Millions have been told to stay away from their offices when the holiday ends in what’s set to become the world’s largest work-from-home experiment. Given China’s role as factory to the world, the disruption to global supply chains will be far-reaching.

Economists have been looking to the 2003 SARS outbreak to formulate their forecasts. Many see a larger economic blow this time around to China and the world. For China, that’s mainly because consumption makes up a far bigger slice of its economy these days; for the world, it’s simply because China’s economy is so much larger.

China accounts for 17% of global GDP these days, up from 4% in 2003, according to Bloomberg Economics. Its nearest neighbors—which are deeply embedded in regional supply chains, export to China’s consumers, and benefit from China’s tourist visitors—will be most affected, Bloomberg economists Chang Shu, Jamie Rush, and Tom Orlik wrote in a note.

From Tokyo to London, hotels, casinos, airlines, and retailers are already recording a downturn and bracing for weeks, if not months, of plummeting spending. About 163 million Chinese tourists made overseas trips in 2018—more people than live in Russia—accounting for more than 30% of travel retail sales worldwide. In 2003, when severe acute respiratory syndrome broke out, only 20 million Chinese travelers went abroad. In Macau, China’s gambling enclave, new travel restrictions and a growing fear of crowds have slashed visitor numbers from the mainland by 82% so far during the Lunar New Year holiday.

Hong Kong, already reeling from months of often violent anti-China protests, is the most exposed, with a probable hit of 1.7 percentage points to growth in the first quarter, the economists wrote. South Korea and Vietnam will also suffer, as will Japan, which is scheduled to host the Olympic Games in Tokyo this summer. Commodity exporters such as Australia and Brazil will also suffer. Big Western economies, with the exception of Germany, face less of a blow because of their smaller export exposure.

Financial markets are also reeling, and any sustained risk aversion and tightening in financial conditions could amplify the economic impact of the outbreak. Monetary authorities including Federal Reserve Chairman Jerome Powell are watching.

Also in focus is the agreement Trump and Liu He so recently signed. China’s promises to increase purchases from the U.S., which experts were already calling unrealistic, will be even tougher to fulfill now that the virus is hammering demand and interfering with supply chains. That raises the question of whether the U.S. will consider the outbreak a “natural disaster or other unforeseeable event,” triggering a clause in the agreement that would prompt fresh consultations should either side fail to comply with its obligations.

“Unless this becomes far worse, I don’t think Trump is going to give the Chinese a pass on this,” says Carl Riccadonna, U.S. economist for Bloomberg Economics. “He needs to run on strong economic growth.”

Chinese President Xi Jinping could have done with an acceleration in growth, too, after last year’s trade uncertainty and financial wobbles. Instead, growth is expected to slow to 4.5% in the first quarter, according to Bloomberg Economics, before a possible recovery in the second quarter and stabilization in the second half.

While Beijing is likely to boost monetary and fiscal stimulus, “it seems unlikely that these measures would turn the economy around, as the virus outbreak may further weaken domestic demand and thus render the upcoming policy easing less effective,” says Nomura Holdings economist Lu Ting.

That leaves China and the world’s outlook hinging on how quickly those hazard-suit wearing workers can stop the spread of the virus. “Rapid containment and escalating contagion are both possibilities and would result in widely different growth impacts,” according to Bloomberg Economics.

©2020 Bloomberg L.P.