With the coronavirus spreading to around 28,000 confirmed cases across 25 countries as at February 6, more than three times the number of SARS cases in 2003, unease is growing about the broader implications beyond the horrible human impact.
That’s to be expected.
China is far more important to the global economy than when the SARS virus took hold, and the coronavirus’ highly contagious nature (more akin to influenza than SARS) is seeing it spread much more rapidly and broadly. Almost two decades on from the SARS outbreak, China is also Australia’s largest trading partner, accounting for 38 per cent of our goods exports across the likes of iron ore, coal and food, plus 33 per cent and 20 per cent of our education and tourism exports respectively.
Considering what we know today, including travel restrictions in response to the virus, we’ve adjusted our forecasts, with the Australian economy expected to feel the brunt of the impact in the first quarter, registering zero GDP growth (downgraded from 0.4 per cent growth). Also factored into our new growth forecast is Australia’s devastating summer bushfire emergency.
Despite some talk of the possibility of a recession (two consecutive quarters of negative growth), we instead expect growth to pick up in the second quarter to 0.8 per cent and 2020 annual GDP growth to print at 1.9 per cent. These numbers also factor in the impact of our revised 2020 year-average growth forecasts of 5.3 per cent for China and 2.8 per cent for the world overall, from 5.8 and 3 per cent, respectively.
How have we come to these forecasts?
If we look back at the obvious historical comparison, SARS in 2003, annualised Chinese GDP growth fell from 12 per cent in the first quarter to around 4 per cent in the second quarter (the three months to June), when the outbreak was most active. But annualised growth quickly rebounded back to double digits in the final two quarters of the year, respectively, once the outbreak had been effectively contained.
Using this experience to assess the potential coronavirus impact, China’s annualised growth would be expected to fall sharply to 2 per cent annualised in the first quarter before rebounding and settling at 6 per cent in the second half of the year.
However, 2020 is not 2003.
Most notably, the 2020 coronavirus outbreak hit during the Lunar New Year holiday period – a peak time for household consumption and travel. Further, given the scale of the population in Wuhan, where the virus originated, and its position as a large transport hub for central China, plus the coronavirus’s highly contagious nature, it looks to be spreading much more rapidly and broadly than SARS, making it more difficult to contain.
Also, while the majority of coronavirus cases so far have been in China – around two thirds occurring in Wuhan and the surrounding Hubei province – the rapid spread of the disease has led authorities in China and abroad to issue travel restrictions and introduce quarantine measures, amplifying the shock to the Chinese economy.
As such, we believe China’s growth in the first quarter will be weaker than the SARS benchmarking suggests, with the economy to stall in the three months to March. Assuming the virus can be contained by March and growth rebounds, we expect China’s year-average growth for 2020 will then print at 5.3 per cent and recover to 6.1 per cent in 2021.
It is important to highlight that weaker growth in China will also have spill over effects to other nations in East Asia such as South Korea, Singapore and Hong Kong, and to markets.
Already, Hyundai has announced the suspension of production in South Korea. Others will follow in the coming days and weeks. Likewise, commodity markets – crucial to Australia as a major exporter of iron ore, coal and LNG – have been responding, with prices coming under pressure in the past month or so, particularly crude oil.
For Australia, it’s clear the economy will be adversely impacted, but with so many forces in flux, the full extent of the impact remains highly uncertain.
As a starting point, we assume that the intense trade disruptions such as the halting of inbound non-resident arrivals from mainland China, announced by the Prime Minister this week, will last for one and a half months. However, there is a clear risk of an extended disruption. For context, goods exports to China are worth about $128 billion a year in real terms. In terms of services, China’s 33 per cent share of our education exports is valued at about $1bn a month. Their share of tourism, a little under 20 per cent, equates to about $400 million a month.
Consumer and business confidence will likely also take a hit as global growth is adversely impacted.
Could the coronavirus and bushfire shocks to the economy prove temporary, as the RBA this week predicted? Of course. But, as highlighted by our revised 1.9 per cent growth forecast for Australia, we believe that these developments are more likely to have a lasting negative impact on growth over the year. To our mind, the risks are also skewed to the downside.
We therefore remain of the view that further policy accommodation from the RBA will prove necessary when it becomes clear to the Bank that its current overly-optimistic expectations for growth and jobs are not being met.
This material contains general commentary, and market colour. This material does not constitute investment advice. This information has been prepared without taking account of your objectives, financial situation or needs. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. Except where contrary to law, Westpac and its related entities intend by this notice to exclude liability for this information.