[Analytics] As China sneezes, global economy gets the chills

The coronavirus outbreak in China, which started in the city of Wuhan, has had analysts scrambling to lower growth forecasts across the board, underlining the country’s dominant role in the global economy. Umesh Desai specially for the Asia Times.

The virus has spread to 27 countries, and although 97% of the more than 28,000 cases are in China, the ripples are being felt even in distant countries. Travel disruptions – more than two dozen airlines have suspended or reduced their flights to China – a lockdown in the province of Wuhan and an extra week’s shutdown in provinces accounting for over two-thirds of the country’s GDP has severely disrupted the global supply chain.

“The novel coronavirus outbreak is a ‘black swan’ event, impacting our projections for global growth in 2020,” said Standard Chartered analysts in a research note. “We have downgraded our forecast for China’s 2020 growth to 5.8% from 6.1%.”

Even before the epidemic, growth in the world’s second-biggest economy had already been expected to slow as the trade war with the United States hobbled its exports and decelerated manufacturing activity. But the efforts to prevent the spread of the virus, with cities under lockdown and restrictions on travel, has sent tremors across the global economy.

Prior to the outbreak, economists at Pictet Wealth Management had expected growth in China to moderate to 5.9% in 2020 from 6.1% in 2019 due to continued trade tensions and the lingering impact of the authorities’ deleveraging campaign.

But following the disruptions to economic activity as a result of measures to halt the spread of the virus, Pictet cut its GDP forecast to 5.6% from 5.9%.

“The services sector, which has accounted for about 60% of Chinese growth in recent years, will be the most heavily hit – especially tourism, restaurants and hotels, entertainment, retail sales, logistics and so on,” they said in a note.

“Industrial production and fixed-asset investment will also be affected by the extension of the Chinese New Year holidays and by interruptions in supply chains.”

Supply chain disruptions

China is a dominant part of the global manufacturing supply chain and the reverberations will be felt across markets and economies.

“Taiwan, Singapore, Thailand and Hong Kong show the highest beta to China’s growth and may experience the largest knock-on effect from China’s expected near-term downturn,” said Standard Chartered economists in a note.

It is estimated that mainland China accounts for 30-40% of global exports of textiles and footwear products, and 20% of the world’s exports of machinery and electrical equipment.

“China’s role in the electronics supply chain is especially critical. Nearly half of Apple’s 800 global production bases are located in China today,” said DBS economist Ma Tieying.

“Meanwhile, about 30 mainland Chinese companies are now on Apple’s top 200 supplier list, including those producing speakers, screens, batteries, flat panels, and engaging in integrated circuit packaging/testing.”

Apple leans on China both as a consumer market and as a manufacturing base for its products sold across the world.

Ma said the regional supply chain showed that China mainly imports intermediate goods from South Korea, Japan and Taiwan and the country’s top destination for intermediate products were South Korea, Japan, India and Vietnam.

“Taiwan, South Korea and Vietnam would be hit the hardest, either in the form of a delay of downstream production or a shortage of upstream raw materials supply,” she said.

For the moment the supply chain disruptions would be mainly felt in emerging Asia with very little impact on developed markets where the value of manufacturing sector inputs from China is less than 1%, Capital Economics’ global economist Simon MacAdam said.

But he added that this partly reflects the fact that manufacturing accounts for a small share of the economy.

“More concerning is the widespread reliance of electronics manufacturers. The autos sector in North America also has relatively large supply chain links with China, which is consistent with recent reports that US car producers are just weeks away from shutting plants due to a dwindling supply of parts,” he said.

That threatens disruptions in the future when bottlenecks in the production of one low-value, but crucial, component can bring higher-value, downstream production to a halt.

And this comes at a time when “China has gone from being a bit player in the global economy in the early 2000s to an economic powerhouse today,” said Moody’s economist Mark Zandi, while highlighting that China’s share in the global economy had risen to 16% from 4% at the time of the last global epidemic of SARS.

“The 2019-nCoV pandemic has suddenly become a serious threat to the Chinese, global and US economies. How serious is difficult to gauge given large unknowns as to how widespread and virulent the virus will be,” he said while lowering his global economy growth forecast to 2.5% from 2.8%.