As Chinese leaders quarantine cities across the country to contain the coronavirus, they have another storm brewing: China’s economic outlook is becoming bleaker with every passing week.
The Coronavirus Is Hurting Sectors Of China’s Economy
The multiplier effect from the shutdown of Hubei province—the epicenter of the coronavirus outbreak—is being felt across the country’s economy and even across the globe in some sectors. As Chinese residents avoid catching coronavirus, they are also growing reluctant to go outdoors which has dampened overall consumer sentiment. China’s economic engine is grinding its gears.
Coronavirus Hit Right Around Chinese Lunar New Year
With the Chinese lunar New Year vacations coinciding with the virus outbreak, the shutdown has prolonged after some provincial officials extended the length of vacations. New Year breaks usually accompany a seasonal spending spree making up for a significant chunk of the annual retail production and expenditure.
The hardest hit sector in China is expected on the services sector especially transportation, which has morphed into an important driver of economic growth in China over the past decade. With these projections, China is unlikely to meet growth targets and a major dent is expected in its first quarter GDP numbers.
China’s Economy Before Coronavirus
The slump comes after China posted a three-decade low growth rate of 6.1 per cent in 2019. A range of domestic factors from slowing infrastructure growth to aging population affected Chinese output last year. In addition to domestic shocks, China’s exports were infamously under spotlight after its brawl with the United States leading to a deal with Trump forcing Beijing to import more of US produce in various sectors.
Market experts expect the government stimulus to negate any dip from the loss of activity due to the virus outbreak. And with the outbreak right at the beginning of the year, the Chinese government is likely to roll out stimulus measures to ramp up consumption and offset any activity slowdown at the remaining three quarters.
Fitch Solutions reiterated a similar view as it maintained China’s “real GDP growth forecast at 5.9pc for 2020 and [held] off on a concrete revision until more data comes in and there is clarity on support measures from the government to counter the negative shock from the 2019 novel coronavirus (2019-nCoV) epidemic.”
Don’t Come Near Me
But Coronovirus’ domestic repercussions aside, the battle for China to grow its exports is expected to take some time to win. With restrictions on shipments and travel, the disruption to the manufacturing sector coupled with the expected cut in services growth is likely to cut 100 basis points from the GDP growth target, according to estimates from some analysts.
The global reaction to the virus has been almost unified: block all movement to and from China. At least 73 airlines have already canceled flights into mainland China.
The subsequent decline in economic activity hit at the heart of small and medium enterprises. These SMEs are expected to fare worst of all as it will lead to significant cash flow constraints and increase unemployment in the medium term.
With analysts quoting the post-SARS reaction as the baseline for gauging China’s reaction to the coronavirus, the stimulus is likely to come from the fiscal side. Given the central government’s prominent role in the economic activity, it can afford a higher debt load and support the economy. The additional push is expected to come from monetary easing to help facilitate credit off take in the post-coronavirus period.