The novel coronavirus outbreak will cause temporary downward economic pressure, but this will neither change the long-run trend of China’s development nor impair the growing global clout of the world’s second-largest economy.
I remember when China fought the SARS outbreak in 2003, some economists claimed the disease could be as devastating as the Asian financial crisis in 1997 for the economy.
The truth, however, is the epidemic lasted for about half a year and caused limited negative impact on the economy. SARS is estimated to have cost only 0.58 percentage point in China’s annual GDP growth, if its drag on the services sector is regarded as its total impact on the economy.
The economic fallout was concentrated in the second quarter of 2003 as the epidemic peaked in April and May. The quarter recorded a 9.1 percent year-on-year GDP growth, 1.5 percentage points lower than the average growth rate of the first and third quarters.
Similar narratives applied to the avian flu, the Middle East Respiratory Syndrome, and the Ebola virus. Battles against those epidemics have showed that any virus of this type should play havoc only temporarily and should not lead to an inflection point on China’s economic development.
So it should be with the novel coronavirus, which was first found in Wuhan, capital of Central China’s Hubei province, and is now a source of public concern nationwide.
Indeed, the novel coronavirus has proven to be more contagious than SARS. Yet the country has reacted with unprecedentedly stringent measures to control the virus from spreading such as shutting down public transport and keeping people who traveled from severely infected areas in quarantine.
If the nation can strictly carry out the control measures, I expect the virus outbreak may peak this month and then gradually fade away.
But it is unreasonable to contend that the economy will come back to normal once the peak is past, as the number of newly confirmed infections may decline slowly, given the speed with which the virus has spread.
Therefore, economic impacts from the outbreak may last for half a year in the optimistic scenario, with the first quarter to endure most of the disruptions. In a pessimistic scenario, the impact may extend to as long as one year.
Economic fallouts caused by the virus are bound to be temporary though, leaving the long-run positive outlook for the Chinese economy intact. Yet we must not underestimate the short-term disruptions.
First, tertiary industries or the services sector that contributed to more than half of China’s GDP last year, will be the most hit.
Retail, finance, property, catering and accommodations are the biggest service industries by output. We will go through impacts of the virus on these sectors briefly.
The most direct impact of the epidemic will be on the industries of catering and accommodations as well as tourism. Revenue in the tourism industry dropped by 11.2 percent in 2003 due to the SARS outbreak. As more stringent measures are now taken to combat the novel coronavirus than SARS, the tourism industry may see a steeper dip in revenue this year.
The outbreak is also expected to weigh on retail sales, whose annual growth may slow down from the 8 percent posted in 2019. But the slowdown may be moderate as e-commerce has accounted for an increasingly higher proportion of retail sales.
The property and financial sectors may also be indirectly affected, as property sales may fall in the first quarter and the epidemic may cause fluctuations in the capital markets and magnify financial risks.
Second, the novel coronavirus outbreak will put pressure on secondary industries. These are mainly the industrial and construction sectors, and the impact will come from both the demand and supply sides.
On the supply side, the fight against the virus requires reducing the movement of labor. Therefore, many factories and construction projects underway may see labor shortages when work resumes after the extended Lunar New Year holiday.
The labor shortage, along with the different schedules of resuming work among different regions, could obstruct some enterprises from normal production.
On the demand side, some countries and regions may choose to reduce or suspend importing particular goods from China to prevent contagion. This could act as a drag on the country’s manufacturing sector.
Third, the novel coronavirus outbreak should have limited impacts on primary industries which are mainly agriculture, forestry and mining. The major impact on those sectors should be the reduction in demand for domestic agricultural products.
As primary industries make up only 7.1 percent of China’s annual GDP, this should not be the major channel of how the outbreak will influence the Chinese economy.
To conclude, I believe that economic impacts of the outbreak will be concentrated in tertiary industries, and secondary industries will also feel the pressure. The full-year GDP growth may be dragged down by more than 0.5 percentage point.
In addition, we should pay adequate attention to the employment pressure brought about by the outbreak, as the services sector and many export-oriented manufacturing sectors are labor-intensive.
To tackle the economic impacts of the epidemic, I think two basic principles should be followed.
The first is to control the epidemic from spreading as soon as possible to help economic activities return to normal.
I would stress the importance of maintaining stringent controls through February, including postponing school openings, work restarts and meetings. Otherwise, if we loosen the above measures for short-term economic stability, the epidemic may linger and cause more damage to the economy.
The second is to adjust previous fiscal and monetary policy plans for 2020 and impose more proactive macro-policies to offset the negative impacts of the virus.
On the fiscal front, it is advisable to elevate this year’s fiscal deficit-to-GDP ratio to 3 percent from the 2.8 percent for 2019, leading to additional annual fiscal spending of around 200 billion yuan ($28.7 billion).
This should be an acceptable deficit level, considering the about-4-percent fiscal deficit ratio for the United States and Japan’s level of around 7 percent.
On the monetary front, more cuts in interest rates and required reserve ratios can be rolled out, with the aim of boosting a certain amount of investment or consumption to fill the gap left by the shock from the virus.
I also suggest encouraging donations from society with a target of raising 100 billion yuan. This would not only increase aggregate spending, but help boost transparency in the governance of society.
If the fiscal spending, monetary easing and social donations can bring in a total of around 500 billion yuan worth of investment and other spending, the negative impact of the coronavirus outbreak will be largely offset.
The writer is the chief economist with Zhongtai Securities.