As the world continues to fight the coronavirus and search for a cure, a storyline that has gone under the radar has been the virus’s impact on the global economy. Tourism and travel industries are among the obvious that will be impacted, but the virus’s economic impact will be much more far-reaching and the Chinese economy may feel its impact for months to come.
The most obvious site of impact will be China’s Hubei province, home of Wuhan, the source of the outbreak, and responsible for 4.5% of China’s GDP. Large scale quarantine in the province limits offices’ and stores’ ability to operate, as lockdown will choke them off from the rest of the world and the opportunity to bring in outside goods for consumption or sale will be closed. As a result, the economic activity of almost any kind will be limited.
Outside of the Hubei province, despite not necessarily being under quarantine, the rest of China will not be able to escape the economic impact of the coronavirus. As citizens live in fear of associating with others and the government limits contact and encourages avoiding large crowds, consumption will fall. In the same way during the SARS epidemic, retail sales are expected to fall well short of last year’s numbers at a time in the spirit of Chinese New Year where consumption would usually be the highest. Fearful of the virus, spending on domestic tourism will fall, as people cancel their trips and opt to stay at home in isolation.
As consumption by Chinese consumers falls, the impact will be felt throughout the global economy. Chinese consumers account for around 35% of global luxury goods sales, with most of that buying occurring outside of China. And as high-end stores close doors in China and wealthy Chinese consumers quarantine themselves at home, the luxury goods sector is bracing for a major hit. In Paris, luxury goods stores are reporting a sharp decline in Chinese shoppers. Outside of the luxury goods sector, Forrester Research Inc. retail analyst Sucharita Kodali expects a potential $1 – 2 billion dollar spending decrease by Chinese tourists in the US over the next six months.
Production in China will also fall, as in fear of the virus, people may decide to stay at home for fear of entering a potentially crowded workplace. Shanghai and Guangdong, two economic hubs within China, have made the decision easy, extending the new-year holiday, which will delay and cut production. Foreign companies have made the decision easy as well, halting production in China and closing factories across the countries. Not so easy, however, will be the decision for factory and migrant workers who may have to decide between going to work or avoiding crowded factories and commutes.
Just a mild work stoppage in China will affect a wide range of sectors throughout the global economy. China is responsible for the production of a wide range of goods that the global market relies on. As The Economist notes, roughly 80% of active ingredients for all medicines come from China, as well as 90% of the world’s plastic companies. Foreign companies will find it difficult to find a short term replacement to Chinese production and may even opt to halt production until the outbreak is handled.
With production and consumption factors in shock, it appears the Chinese economy will be in for a morbid showing. Some believe China’s growth could be at 2% in the first quarter of 2020, a measly number for an economy that was at well above 6% growth just a year ago. HIS Markit, a London-based data analysis firm, has already predicted that the coronavirus’ outbreak will be worse for the global economy than the 2003 SARS epidemic. These factors point to a very bad showing for the Chinese economy and depending on the longevity of the current outbreak, it may only get worse. Another factor to also consider is the doubt companies and consumers will have of China in the immediate aftermath of the outbreak. International tourism may take years to come back to normal, as people continue to mistrust a communist regime that silenced the doctor who initially reported the outbreak. Companies, in fear of another mishandled outbreak, may start to shift production outside of China, further hurting the economy.
The long term economic consequences, for now, are unknown and predicated on whether or not this current outbreak is solved soon and whether “normality” will resume in due time. As such, China should remain focused on containing the current outbreak and hope that the economic impact the current impact will not seep into the long term.