Coronavirus could slow China’s new growth driver: Consumption

It’s too early to quantify the potential economic impact of the coronavirus that has emerged in the central Chinese city of Wuhan, S&P Global Ratings says in a report released today.

However, it is possible to identify the channels most likely to take an economic hit, and these include household consumption, an increasingly important driver of growth.

“The outbreak is hitting China during Lunar New Year, a period when households tend to spend more on travel, entertainment, and gifts,” says Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings.

The severity of the impact will depend upon the attack rate (the proportion of the population that falls ill) and the case fatality rate (the proportion of deaths). Health authorities are indicating for now that it is too early to assess these statistics for the new coronavirus.

“Epidemiological uncertainty is compounding economic uncertainty, ” the report states. “We identify several channels most vulnerable to a spread of the infection, or measures taken to prevent the spread in China. These include household consumption, investment, travel and tourism, and industrial output (if supply disruptions occur).”

Some of the impact could be offset by increased government consumption, e.g., through higher spending in response to the outbreak, including on health personnel, emergency services, and vaccines.

“Industries exposed to China’s household spending, especially activities that take place outside the home, will likely feel the biggest economic impact of the outbreak,” said Mr. Roache. “Risk aversion and tighter financial conditions could amplify the impact, including on investment.”

While the outbreak is centered in Wuhan, other large population centers including the major “tier-1” cities have begun reporting cases. Given the typical lag between contracting the virus and showing symptoms, consumers are likely to avoid public spaces to lower the probability of infection.

To give a sense of how big the effects could be, consider that in China during 2019, consumption contributed about 3.5 percentage points to the overall real GDP growth rate of 6.1%. A back of the envelope calculation suggests that if spending on such services fell by 10%, overall GDP growth would fall by about 1.2 percentage points.

As to potential regional and global impacts, this depends on the extent to which the virus spreads outside China. “Even if contained, we expect some spillover to Asia-Pacific, given that Chinese tourists represent a large proportion of arrivals for economies including Thailand and Vietnam, among others. Equity market volatility across the region has edged higher but currency and bond markets have been calm.”





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