25 Feb 2020
Posted in Business Fundamentals
Coronavirus outbreak threatens China’s already tepid economic growth, observes GlobalData
As China battles to contain the Wuhan coronavirus (Covid-19) outbreak, the effect of the epidemic is dampening the prospect of upturn for the world’s second largest economy, says GlobalData, leading data and analytics company.
Factories across several Chinese cities were shut down following the outbreak which is affecting the manufacturing industry of the country. According to National Statistics Bureau of China, the Manufacturing Purchasing Manager’s Index (PMI) and New Export Order Index tumbled in January 2020.
If the country observes rapid recovery from virus by March, GlobalData projects the economic growth at 5.4% by Q1 2020. In the alternative scenario of moderate recovery from the Covid-19 virus by April, real GDP is anticipated to grow at 4.4% by Q1 2020. In the worst case scenario, if the containment of virus is blocked, the economy might witness a clobbered growth of 3.9% during the quarter.
Shruti Upadhyay, Economic Research Analyst at GlobalData, says: “Considering the effect of deadly Covid-19 on various sectors, the stagnation of production processes along with quarantine restrictions had a considerate spillover effect on industries such as travel & tourism, retail & consumers, automobile, e-commerce, technology and transport.”
A dramatic slump was observed in the Shanghai Composite Index on the first day of trading after the Lunar break amid the fear of broad weakening of demand. The outbreak created a ripple effect on commodities such as iron ore, copper and crude oil, which have witnessed the maximum downfall in prices and have hit multi-year lows.
The People’s Bank of China (PBOC) injected US$175bn into the economy and cut interest rates in February 2020 to tackle the situation. These steps may lead to hyperinflation as a result of lockdown and minimal supplies, consecutively leading to depreciation of Yuan, in the impending quarters.
Upadhyay continues: “The outbreak is anticipated to essentially affect the country’s ability to meet the purchasing agreement targets of importing US$200bn of goods decided in the phase one deal signed between the US and China, apart from pre-trade war purchases, leading to a plethora of upcoming concerns for the country.
The hasty spread of Covid-19 led to an evident decline in the number of tourists visiting the country, which is expected to affect the travel & tourism industry and the economy in the remaining year.
Upadhyay explains: “With the staggering rise in the death toll caused by the outbreak, the chances of China achieving the US$1 trillion revenue target from tourism by 2020 as part of government five-year tourism plan seems bleak in the near future.”
Meanwhile, the epidemic is expected to have a positive effect on industries such as e-commerce and online food delivery, as people increasingly try to stay at home and opt for online shopping and online ordering. Industries such as medical supplies and pharmaceuticals are expected to thrive as a result of massive demand for protective clothing and gears required until the effects of Covid-19 have toned-down in the country.
Upadhyay concludes: “The government must embark on expansionary fiscal policies along with ensuring minimal shortage of liquidity to curb the escalating disruptions in the economy. Flexible funding provided by the government in terms of R&D related to diagnostics and treatments will help conquer the epidemic in the coming months and rest of the year.”