Coronavirus impact: Experts see weakest quarter for global growth since GFC

The main channel of economic disruption at this stage, according to UBS, is largely via reduced tourism flows (in/out of China), and reduced import demand from China.

With coronavirus getting a tighter grip on the China and impacting world trade, most analysts have started lowering global growth forecasts as measured by the gross domestic product (GDP) for the first quarter of calendar year 2020 (Q1-2020). Those at UBS, for instance, expect this would be the weakest quarter for global growth since the global financial crisis (GFC) and on par with the Asian crisis in the late 1990s.

Global GDP, according to Arend Kapteyn, global head of economic research at UBS, will take a serious knock and slip to 0.7 per cent in the January 2020 quarter (Q1-2020) from 3.2 per cent in the December 2019 quarter (Q4-2019). Though he expects growth to rebound in the April – June 2020 quarter, the impact could slow the overall 2020 GDP growth by 20 basis points (bps) to 2.9 per cent.

The main channel of economic disruption at this stage, according to UBS, is largely via reduced tourism flows (in/out of China), reduced import demand from China — particularly of consumption goods — and restrictions imposed by third countries to avoid the virus spreading.

“We expect import growth in China to fall from 3.2 per cent in Q4 to a negative 4 per cent in Q1. The rebound we hope for in Q2 largely reflects delayed consumption effects in China, while the improvement in Q3 reflects the lagged impact of stimulus coming on line, particularly in China,” the UBS report says.

With the number of suspected/confirmed cases rising at an alarming rate, close to 99 per cent of those are in China, reports suggest. The economic impact, experts say, will also be magnified this time around compared to the SARS outbreak as Asia's weight in the global economy has risen from 21 per cent in 2003 to 37 per cent now.

Chinese economy

As regards China, the GDP projection for the January 2020 quarter (Q1-2020) presents a more alarming picture. Analysts at Nomura led by Rob Subbaraman, their head of global macro research and co-head of markets research along with Sonal Varma and Rebecca Wang expect the GDP growth in China to sink to 3.8 per cent during this period, as compared to 6 per cent in the previous corresponding quarter. They, too, expect this to rebound in Q2-2020 to 6.4 per cent on pent-up production and demand.

“The size of China’s economy has swelled to about 16 per cent of world GDP from 4 per cent during SARS in 2003. Our results show that nine out of the top 10 vulnerable countries are in Asia and include Hong Kong, Singapore, Taiwan, Japan, South Korea, Thailand, Malaysia, the Philippines and India,” the Nomura report says.

However, Nomura's base-case assumption is that the coronavirus infection rate in China will start to taper in late February allowing the government to ease the lockdown of major cities in March, and that the infection rate outside China does not accelerate.  

UBS, too, sees China’s GDP to slip to 3.8 per cent in Q1-2020 and rebound in Q2-2020 onwards.

“We downgrade China's 2020 GDP growth forecast to 5.4 per cent. As the coronavirus is a one-off negative shock, we expect China's GDP growth to rebound to 6 per cent in 2021 as activities normalise. Notwithstanding the big negative hit on consumption from the virus outbreak, China's long-term trends of moving towards a more consumption oriented economy, of rising services share in the overall economy, and of technological upgrade should continue as well,” the UBS report says.