The Coronavirus puts World economy on hold

A man with a mask passes through the Lujiazui financial district in Pudong (Shanghai). Aly Song (Reuters)
A man with a mask passes through the Lujiazui financial district in Pudong (Shanghai). Aly Song (Reuters)

The rapid expansion of the outbreak has weakened the growth prospects in China and with that of the entire world.

China is the heart of the world. When the blood of the Asian giant pumps without any obstacle, the development of the planet becomes strong. But if the flow decreases or the rhythm of the beats is disturbed, the signs of instability begin to be felt in the four cardinal points. Such is its pushing force that 39% of the economic expansion of the globe in 2019 has been thanks to this emerging power, according to the International Monetary Fund (IMF). This marked role has been evidenced by the outbreak of coronavirus (2019-nCoV), which has paralyzed industrial activity in the Asian nation and thus has put on the ropes to financial markets, the price of raw materials and global trade .

“Economic uncertainty is growing.”

says Miguel Ángel Ariño, director of the IESE decision analysis department.

The unexpected health crisis in China has left growth forecasts on wet paper and has come to inject additional pressure into a country that is already suffering a slowdown, as a result of the trade war with the United States.

“Calculating the impact of the health emergency is not easy.”

says Simon MacAdam, an economist at the British consultancy Capital Economics.

Oxford Economics analysts have estimated that Chinese GDP will only grow 5.4% this year, compared to the 6% expected before the outbreak. The impact for the world will be about 0.25 percentage points less. According to the IMF, the global economy would grow 3.4% this 2020. But not everything is said.

“This is a matter of time.”

says MacAdam.

If 2019-nCoV stops its advance before the end of February, China and the world will suffer only a slight drop in GDP, the analysts consulted agree. But if it continues to spread, the consequences are incalculable.

“The global impact could be up to four times greater than that of the SARS [severe acute respiratory syndrome] outbreak in 2003.”

says Warwick McKibbin, professor of Economics at the National University of Australia.

Then the virus – which 8,000 people were infected and claimed 774 lives – was a coup of 40,000 million dollars (36,000 million euros, at the current exchange rate) for the global economy and a bite equivalent to 0.1% of the World GDP, according to McKibbin.

The China of those years is not the same today.

“It is now an integral part of the economy.”

says Stéphane Monier, head of investments at Lombard Odier, a Swiss financial institution.

The Asian giant has gone from being the sixth power in the world in 2003 (just slightly larger than Italy) to the second most powerful, just behind the US . It currently controls 17% of global GDP, while 17 years ago it only paid 4%. In addition to this, it has become the largest manufacturer on the planet. Not only low value goods are produced, but also products of high industrial level. There are assembled from the iPhone to some models of General Motors, Ford, Fiat Chrysler and other automotive companies.

“There is a growing concern about the disruption in the supply chain”

comments the experts from Capital Group.

That is why as China struggles to contain the coronavirus, it becomes increasingly clear that the economic downturn will have an impact on the world, explains a Bloomberg Economics document. The analysis firm forecasts that Chinese GDP will slow down to 4.5% during the first four months of the year, after having grown 6% in the last four months of 2019. Under this scenario, world GDP could reduce its progress 0.4% The biggest affected will be Hong Kong, South Korea, Vietnam, Brazil, Australia, Indonesia and Japan. Spain will hardly notice an impact.

China is the world’s largest consumer of raw materials. Any movement in its demand has an impact on the price, mainly in the one of the industrial metals used in the manufacture of cars, airplanes and electronic devices. The price of copper, nickel, aluminum and zinc, among others, have presented losses when the emergency exploded.

For example, the price of copper – the barometer for measuring global economic health – has fallen more than 7% since January and has lost all progress at the end of last year, when a first agreement between China and the US was announced to Resolve the commercial war. This drop affects Peru and Chile, the two main world producers of this metal, essential for the Hubei industry, the province that has Wuhan as its capital, the epicenter of 2019-nCoV.
Raw Materials

Other raw materials such as oil have also been victims of the outbreak. The price of the brent has been left more than 17% since the beginning of 2020, until reaching a price below 55 dollars per barrel.

“Saudi Arabia is the most affected by the reduction, because it is the main supplier of China.”

explains Jorge Piñón, an expert in energy policy at the University of Texas.

OPEC and its partners had an emergency meeting last week to analyze a possible cut of up to 600,000 barrels per day in production. But they did not reach any agreement.

“If the virus continues to expand, Saudi Arabia could make the unilateral decision to cut its production. It is the only country that can turn off the tap”

notes Piñón

While this is happening, the price of gold, the metal refuge par excellence, has rebounded more than 2.5% since January. Meanwhile, the Shanghai Stock Exchange (closed during the Lunar New Year holidays) has left 7.6% so far this year, despite the efforts of the Chinese Central Bank, which has injected liquidity into the market.

“We hope that normality will recover immediately and that companies and consumers will release accumulated demand.”

concludes MacAdam.

The next few days will tell you if the economic quarantine continues or you have to wait longer.

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