From an economic perspective, the coronavirus epidemic represents a combination of a demand, a supply and an uncertainty shock. The weight of China in world economy, its contribution to global GDP growth and its role in global value chains imply that the international repercussions are more far-reaching than during the SARS crisis in 2003.We have to brace for poor data in February and March, so the real test is whether April sees a pick-up in business surveys. Absence thereof would fuel concerns that the impact is more lasting in nature which would put us in a U-type scenario. An L-type scenario looks unlikely as yet whereas a V-type recovery would supposes a swift decline in new cases.
At the start of the year, it looked like we were heading for a J-type recovery of global growth.. Not a steep J, more like flattish growth in the early part of the year followed by a gradual pick-up in the second half, on the back of better business surveys, reduced uncertainty and accommodative monetary and financial conditions. The outbreak of the coronavirus has changed the scenario and the question now is whether the recovery will be V, U or L-shaped.
From an economic perspective, the epidemic represents a combination of three shocks: a demand, a supply and a confidence shock. On the demand side various transmission channels can be distinguished. Chinese household consumption declines because people have to stay home, suffer an income loss, feel uncertain and hence postpone big ticket purchases. Foreign travel declines as well as purchases of foreign goods, so imports decline. Public spending will increase slightly –investment in health care facilities- or perhaps more significantly to support growth. Corporate investment will decline because of reduced demand but in particular, increased uncertainty.
In terms of impact on the rest of the world, the decline of Chinese imports and tourism represents a direct spillover effect. Sector effects can be huge, think of tourism, restaurants, the IT sector, commodities or the automobile industry. . Countries which experience a decline in Chinese demand will in turn import less intermediate inputs that go in their exports. The relevant metric in assessing the exposure to a growth shock in China is how much value added from a given country is embedded in Chinese final demand -domestic and exports. This in turn can be related to the country’s GDP.
