Coronavirus risk of contagion is affecting economic activity and financial markets - Photo by Xinhua

JAKARTA (TheInsiderStories)Coronavirus risk of contagion is affecting economic activity and financial markets. The immediate and most significant economic impact is in China but will reverberate globally, given the importance of China in global growth as well as in global company revenue, Moodys said on Thursday (01/30).

By sector, the coronavirus will likely have the largest negative impact on goods and services sectors within and outside of China that relies on Chinese consumers and intermediary products. The World Health Organization said Wednesday that China’s coronavirus has infected nearly 6,000 people domestically so far, with an additional 68 confirmed cases in 15 other countries.

“In our baseline, we expect the outbreak to have a temporary impact on China’s economy and for annual GDP growth in China to remain in line with our forecast of 5.8 percent in 2020. However, the composition of growth will likely shift because of a dampening of consumption in the first quarter, potentially offset by stimulus measures,” Claire Li, Analyst, Credit Strategy & Research at Moody’s Investors Service, said in a statement.

Over the past 16 years, the contribution of consumption to China’s economic growth has risen significantly. Therefore, the impact of the coronavirus through the consumption channel may well be higher now. If there is indeed a sharp slowdown in consumption, we would expect the macroeconomic policy to be eased in response. This could lead to a shift in the drivers of growth in 2020, Moodys said.

The virus will likely have an effect on the revenue of China’s discretionary travel, transportation, lodging, restaurants, retail, and services sectors. However, the impact on offline retail sales could be smaller compared with the weakness following the SARS outbreak because of the rapid shift to online sales in China over the past decade. Non-discretionary consumer demand related to the healthcare sector and medical equipment will likely surge.

Loss of productivity will likely weigh on domestic supply as a result of sickness, furloughs, and potential delays in manufacturing production given the government’s decision to extend the Lunar New Year holiday. This situation will likely also reduce private investment, but this effect will be secondary to the effect on consumer spending, and will also depend on the macroeconomic policy response.

The outbreak began in Wuhan, the capital of Hubei province and the key transportation and industrial hub in central China. Hubei had expected to record a regional economic growth rate of up to 7.8 percent in 2020 according to the local authorities, 200 basis points higher than our forecast for China’s total economy. As China’s ninth-most populous and seventh-highest province by GDP, a slowdown in economic activity will pose significant repercussions for the country as a whole.

The fear of contagion risk is already evident in global financial markets. In addition, the negative spillover will also affect countries, sectors, and companies that either derive revenue from or produce in China. China has an even higher share in world growth and is even more closely connected with the rest of the world than during the SARS episode.

The outbreak will also potentially have a disruptive effect on global supply chains. Global companies operating in the affected area may face output losses as a result of the evacuation of workers. Companies operating outside China that have a strong dependence on the upstream output produced from the affected area will also be under pressure because of possible supply chain disruptions resulting from temporary production delays.

The outbreak will take a toll on tourism sectors elsewhere in the region, and places outside the region that receive tourists from China. The fear of contagion could dampen consumer demand and affect tourism, travel, trade, and services in Hong Kong, Macao, Thailand, Japan, Vietnam, and Singapore, which have been the top destinations of Chinese tourists in recent years.

China’s National Immigration Administration recorded outbound travel grew about 12 percent year-on-year to 6.3 million trips during the 2019 Lunar New Year. Following the SARS outbreak, tourism fell sharply in most of these economies, particularly in Singapore and Hong Kong, which were also subject to a relatively high number of infections.

Moodys expect the risk of potential negative spillovers to domestic tourism in neighboring countries to be higher than during SARS because Chinese nationals now make up the largest share of visitors to other Asia-Pacific economies. The timing is particularly bad for Japan as it seeks to rebound from the dip in consumption, and presumably real GDP growth, in the last quarter of 2019 following a sales tax hike.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com