The Global Economy Update: The coronavirus will dent growth

The coronavirus (COVID-19) epidemic could be more damaging to the global economy than the SARS outbreak in 2003, maintains the IHS Markit February Global Economic Forecast.

“At the time of SARS, China was the sixth-largest economy, accounting for only 4.3% of world GDP. Mainland China is now the world’s second-largest economy, accounting for 16.5% of world GDP in 2019,” observes Chief Economist Nariman Behravesh. “If the unprecedented confinement measures in China stay in place until the end of February, the resulting economic impact will be concentrated in the first half of 2020, with a reduction in global real GDP of 0.8% in the first quarter and 0.5% in the second quarter.” 

Sara Johnson, Executive Director, Global Economics, adds that in this scenario, the coronavirus and resulting measures will reduce global real GDP growth by 0.4 percentage point in 2020. 

“Conversely, the lifting of the confinement measures would add 0.4 percentage point to global real GDP in 2021,” says Johnson. “If confinement measures are quickly lifted, as in our current base case, the impact on global GDP will be more limited, resulting in a 0.1-percentage-point reduction in global GDP growth in 2020, with a correspondingly smaller rebound.”

Here are highlights of the latest forecast:

The United States: Steady growth, despite the global risks. Fourth-quarter real GDP growth was reported at a 2.1% annual rate in the advance estimate. Of note was the unexpected weakness in consumer spending and somewhat less momentum heading into the first quarter of 2020. Inventory investment was lower than anticipated in the fourth quarter, but restocking will lead to a stronger contribution to GDP growth in 2020. Factoring in other developments, we edged up our forecast of 2020 GDP growth, and edged down our forecast of 2021 growth. The coronavirus epidemic is not likely to have a measurable impact on US growth, a view reinforced by the recent snapback in US equity markets.

Europe: Weak, but relatively steady. Real GDP increased just 0.1% quarter on quarter in the final quarter of 2019, its weakest performance since the first quarter of 2013. Full-year growth was 1.2% in 2019, down from 1.9% in 2018. Eurozone real GDP should accelerate during 2020, supported by somewhat stronger exports and solid private consumption growth. Yet, the low starting point limits annual growth in 2020 to just 0.9%. Political uncertainty in several countries (Germany, Ireland, and Italy) has risen recently. The UK economy stalled in the fourth quarter, as growth in services and construction was offset by contraction in manufacturing. Brexit fears could continue to hurt investment in 2020–21, with UK firms now focusing on the risks of a rushed, bare-bones free-trade deal that brings new nontariff barriers and custom checks. Consequently, UK real GDP is projected to increase only 0.7% this year.  

Japan: The effects of the coronavirus will be negative, but small. Reflecting the consumption tax increase in October and natural disasters, real GDP declined at an annual rate of 6.3% q/q in the fourth quarter, resulting in annual growth of just 0.7% in 2019. Japan’s economy should resume growth in the first quarter of 2020, thanks to pent-up consumer demand and government stimulus. The coronavirus impact on tourism in Japan will be larger than that of the SARS epidemic, given that the number of visitors from China in 2019 was more than 20 times that of 2003. Furthermore, the shutdown of Chinese factories, if prolonged, could delay the recovery in Japan’s exports.

China: The damage to the economy from the coronavirus will be intense but probably short-lived. Comparisons with the SARS epidemic of 2003 provide some indications of the likely impact of the coronavirus. The coronavirus is more contagious than SARS, but with a lower fatality rate. Mainland China’s economy is not only much bigger than in 2003, but it is much more globally interconnected through supply chains and tourism. Having learned from the earlier episode, the Chinese government’s response this time has been much faster. The impact of SARS on real GDP growth in 2003 was around 1.0 percentage point. In a severe coronavirus scenario (lasting through the end of February), China’s growth would be cut by about 1.5 percentage points. In a quickly contained scenario (our current forecast), the hit to growth would be around 0.4 percentage point.

Other large emerging markets: The impact on the rest of Asia would be much bigger than on other emerging regions. The 2003 SARS crisis also hit the economies of Southeast Asian markets, including Australia, Malaysia, Singapore, and Vietnam. Since 2003, aside from its growing importance to global supply chains, China’s international tourism has boomed. Popular Asian tourist destinations such as Thailand, Vietnam, Japan, Singapore, and South Korea are especially vulnerable. Sectors of the economy that have already been hit hard include retail stores, restaurants, conferences, sporting events, tourism, and commercial aviation. IHS Markit estimates that in a severe scenario, growth in the rest of Asia would be cut by 0.8 percentage point. In a limited crisis, growth would only diminish 0.1 percentage point. Growth in the other emerging regions would be hurt much less. They are typically less dependent on Chinese tourists and trade, although lower commodity prices will hurt many of these economies.

Bottom line: The coronavirus-induced slowdown in China and the rest of Asia should be sharp but short. Elsewhere, the impacts will probably be small.