Wednesday, 12 February 2020

Coronavirus: What’s the Economic Impact?

From border closures to factory shutdowns the epidemic threatens a heavy economic cost. The death toll as at 12th February 2020 was 1,115 with over 45,057 confirmed cases. Experts predict more than 100,000 could be infected worldwide. More than 60 nations have imposed entry restrictions on Chinese nationals.

Chinese tourists spent USD 277 billion worldwide in 2018. Curtailing this travel market could erase up to 3% of GDP of more exposed economies including Hong Kong and Thailand. Chinese industry is facing disruptions in at least 25 provinces. Protracted factories shutdowns threaten supplies of electronics, consumer goods and other manufacturing output. It will hit other Asian countries like Vietnam, Taiwan, Malaysia, South Korea and Thailand due to supply chain linkages. Secondary shocks will also be felt by Germany and Japan.

China’s growth rate could drop by up to 2% in the current quarter due to the outbreak (Nomura estimates). That could mean over USD 60 billion loss. For the year as a whole, it could be a 5% growth in GDP – the slowest since 1990 (based on ANZ Research). Over 290 million migrant workers are most exposed to the slump. More than 10 million migrant workers from Hubei province face discrimination from employers fearful they may spread the virus. Unemployment rate has traditionally hovered around 4-5% but with the outbreak this could spike.

Global equity prices fell by 3% with Hong Kong down by 7%, Shanghai (8%), Japan, South Korea and India, all losing ground.

According to Chinese economist, Zhang Ming, the Chinese Government will have to be more aggressive in the coming months. Both Central and local governments have allocated USD 12.6 billion so far on medical treatment and equipment. The central bank will have to cut interest rates further and provide ample liquidity to stabilise the economy.

What are the far-reaching industry ramifications?

Luxury brands market grew 5% in 2018 to reach Euro 1.3 trillion, according to Bain & Co. Chinese customers account for 90% of the growth.

RBC analysts estimate a 10% drop in Chinese consumption in first half of 2020, could translate into 2% reduction in luxury companies’ revenue and a drop of annual profits by 4%.

The impact of the coronavirus on Macau (and its gaming operations) is immediate. Tourists from mainland China fell 80% in a day (during the Chinese New Year holidays).

Major hotel groups, Airbnb, Disneyland, and other entertainment centres are severely impacted. Airlines stocks have been battered and Cathay Pacific wants its staff to take 3 weeks of unpaid leave. Airline revenues on key routes could fall by a third. Banks are encouraging staff to defer going to China and those returning, to work from home (for at least 14 days).

Car purchases in China are likely to be delayed. Wuhan is a major automotive hub for PSA, Nissan, Honda, GM, Geely and Renault. And China sales are significant to global carmakers’ profits.

These are some of the primary impact globally. Then there are secondary impacts which may include property sales, restaurant revenue and other consumer sales. The counter balance is the higher sales of masks, gloves, sanitizers and other medical items.

What about Malaysia?

China is both Malaysia’s largest import source and export destination. For the past 11 years, the country has been Malaysia’s largest trading partner and last year, it accounted for 17.2% or RM315.19 billion of Malaysia’s total trade. The ASEAN 5 (Malaysia, Indonesia, the Philippines, Singapore and Thailand) were projected to expand by 4.8% in 2020 by the IMF. But this was before the virus. Now, it may be 0.5% - 1% lower because of tourism, trade and supply chain disruptions.

And where is the Malaysian Government on this? First, it has to present a strategy paper or a Treasury estimate of the impact and cost to the economy. Next, it has to engage with industry players/ experts on impact and assess requirements to stabilize situation. Third, it has to present a Stabilisation Fund and measures to overcome the expected downturn, Fourth, it has to create a specific unit to handle queries, process requirements and meet small and medium enterprises that are (or are going to be) impacted. And finally assess what else could have been done to ameliorate the situation. We are in a bad place now. It is good to put in place immediate measures and prepare the country for a worse case scenario.

Source: Hector Retamal/AFP


1. Anthony Fensom, Coronavirus: The Threat to the Global Economy
2. The coronavirus could cost China's economy $60 billion this quarter. Beijing will have to act fast to avert a bigger hit, 31 January 2020, CNN Business
3. The impact of coronavirus across industry and finance
4. Malaysia prepping its booster shot for the economy, 6 Feb 2020, The Edge Financial Daily

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