EcoWeek

The coronavirus: putting a number on the economic consequences

Eco week 20-06 // 14 February 2020  
economic-research.bnpparibas.com  
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EDITORIAL  
THE CORONAVIRUS: PUTTING A NUMBER ON THE ECONOMIC CONSEQUENCES  
Putting a number on the consequences of the coronavirus is a huge challenge. On some of the topics we have a satisfactory  
level of visibility of the order of magnitude: international spillover effects of the demand shock, repercussions of the global  
increase in uncertainty. The visibility is much lower concerning the effects of the supply disruption. This is even more the case  
for the impact on China. In the near term, data surprises –the difference between the consensus forecast and the outcome-  
should be higher than normal. However, provided that the peak of the epidemic is reached quickly, visibility should improve  
quickly and hence support confidence.  
Given the Chinese weight in the global economy, assessing the conse- the rest of the country. Confidence effects should also act as a drag on  
quences of the coronavirus for economic growth is of key importance. spending throughout the country.  
However, it also a daunting task. Macroeconomic data collected fol-  
lowing the outbreak still need to be released. The ripple-effect of the  
that a 1% decline in Chinese growth lowers European growth in the  
Turning to the international repercussions, research by the IMF shows  
supply chain disruption is an additional source of complexity. Then  
there is the role of psychological factors: to what extent will the drop  
in confidence impact spending, in China and abroad? Looking at the  
signals from financial markets provides little clarity. On Wall Street,  
the epidemic has merely caused a blip and the S&P500 has made new  
all-time highs. Indices in Europe have also done well. This probably re-  
flects a view that production and demand should rebound quickly and  
that the fall-out for US or European companies should, on average, be  
rather limited. Obviously, the story is different for Chinese companies,  
which explains why the Shanghai index is still down compared to the  
level before the crisis hit. The psychology of individual investors will  
also play a role. The big drop in commodity prices (oil, copper) shows  
an expectation of a major decline in commodity demand, largely driv-  
en by China, but tells us little about what to expect in the rest of the  
world.US treasury yields have rebounded but have not fully recovered.  
Bond and equity investors are not exactly aligned in their assessment  
of the growth outlook, although the expectation that, if necessary, the  
Federal Reserve will cut rates could also play a role.  
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3
medium run with 0.2% . The number for the US should be even lower .  
MARKET DEVELOPMENTS (YTD)  
Index 01/01/2020 = 100  
105  
2,0  
,9  
1
1
00  
1,8  
1,7  
1,6  
9
9
8
5
0
5
1,5  
1,4  
1,3  
1,2  
1,1  
1,0  
S&P500  
Eurostoxx50  
Shanghai SE  
LME Copper  
Brent  
As discussed in the previous issue of Ecoweek, the epidemic combines  
a demand, supply and confidence shock. Assessing the supply shock  
is particularly difficult because of the lack of data. It depends on the  
specific organisation of value chains at the individual company level,  
on the level of inventories, on the (im)possibility to find alternative  
sources of supply. Anecdotal evidence points towards a considerable  
US 10Y Treasury yield [RHS]  
8
0
01/01/20  
11/01/20  
21/01/20  
31/01/20  
10/02/20  
SOURCE: DATASTREAM, THOMSON REUTERS, BNP PARIBAS  
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impact from supply chain disruption . Concerning the shock to demand  
in China, the task is hardly easier. The gross regional product of Hubei  
province, the epicentre of the epidemic, represents 4.2% of the coun-  
try’s total. Under the realistic assumption of a significant contraction  
in activity, one ends up with a non-negligible impact on the country as  
a whole, to which spillover effects should be added: a drop in demand  
in Hubei will entail fewer purchases of goods and services produced in  
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. China spillovers. New Evidence from Time-Varying Estimates, Davide Furceri, João Tovar  
Jalles, and Aleksandra Zdzienicka, IMF Spillover Note 7, 2016  
. The IMF study does not report numbers for the US. However, another study calculates  
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the effect on the export level from a 1 percent demand shock in China. For the US this  
corresponds to about 0.4%, in line with Germany but more than the EU (source: Spillover  
implications of China’s Slowdown for International Trade, Patrick Blagrave and Esteban  
Vesperoni, IMF Spillover Note 4, 2016).  
1. Alibaba chief blames spread of virus for disruption to staffing and deliveries, Financial  
Times, 14 February 2020.  
On some of the consequences we have a satisfactory level of visibility of the  
order of magnitude: international spillover effects of the demand shock,  
repercussions of the global increase in uncertainty. The visibility is much  
lower concerning the effects of the supply disruption and, even more so, the  
impact on China.  
The bank  
for a changing  
world  
Eco week 20-06 // 14 February 2020  
economic-research.bnpparibas.com  
3
EDITORIAL  
For sub-saharan Africa the impact is -0.7%, for Asia about -0.3% and Clearly, the jump in uncertainty will depend on the economic exposure,  
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Latin-America and the Caribbean -0.4% . Then there is the impact hence it will be far bigger in China than in Europe. Assuming a tem-  
from the jump in uncertainty. Analytically this raises two challenges: porary one standard deviation uncertainty shock for the eurozone, the  
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quantifying the increase in uncertainty and estimating its impact. On peak impact on growth should be about -0.3% .  
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the former, a recent analysis by the ECB shows the development of  
To conclude, on some of the topics we have a satisfactory level of vis-  
economic uncertainty and trade-related uncertainty since the mid-90s.  
ibility of the order of magnitude: international spillover effects of the de-  
This allows to gauge the impact of certain events (9/11, Iraq war, eu-  
mand shock, repercussions of the global increase in uncertainty. The visi-  
rozone sovereign debt crisis, etc.) on uncertainty. With the exception of  
bility is much lower concerning the effects of the supply disruption. This is  
the collapse of Lehman Brothers, most shocks correspond to a move  
even more the case for the impact on China. This means that in the near  
of the uncertainty measure of about one standard deviation. Obviously,  
term, data surprises –the difference between the consensus forecast and  
this does not tell us where the coronavirus ranks but it does allow for  
the outcome- should be higher than normal, which should be a source of  
a, admittedly very judgmental, comparison.  
market volatility. It could even push companies to adopt a wait-and-see  
attitude until a clearer picture emerges. To the extent that the peak of  
the epidemic is reached quickly, this should improve visibility of how  
demand and activity evolve and hence support confidence.  
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. This is related to the impact on commodity exports (price and volume effect).  
William De Vijlder  
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. Box 1. Tracking global economic uncertainty: implications for global investment and  
trade, ECB Economic Bulletin, 1 2020. The ECB’s measure of economic uncertainty is based  
on the forecast errors of models for a broad range of economic variables for 16 euro area  
trading partners, which together account for around 70% of world GDP.  
6. Source: Box I.1: The economic impact of uncertainty assessed with a BVAR model,  
European Commission, European Economic Forecast, Spring 2017  
The bank  
for a changing  
world  
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