The Coronavirus is not just a global health scare but also a risk to the global economy and markets. China has a history of health scares. Who can forget the SARS epidemic in 2002/03, which claimed 774 lives? So far, the Coronavirus has claimed more than 1,300 lives. Today, the Chinese economy is several times bigger and is more intertwined with the global economy, therefore, the disruption caused by the Coronavirus should be greater than that caused by SARS.
As part of the process of controlling the outbreak, China has closed down a significant part of its economy and this has had an impact on the global economy. Factories that have been shut down include those that assemble the Apple iPhone. It has also strained supply chains for global businesses and the tourism industry.
The Chinese economy is the second largest in the world and grew 6% in 2019. This was the lowest annual growth rate for almost 30 years. Economists are forecasting that in the first quarter of 2020, the Chinese economy will grow at an annualised rate of 4%, but most analysts are still predicting annualised growth in 2020 well above 5%.
Economies that are closely tied to China are Australia, Japan and South East Asia. The oil price has fallen sharply and reflects the downgrades in economic growth. Economists are predicting a negative impact of 0.3% on global growth.
The big unknown is how long the health scare will last, but markets are expecting it to have a short-term impact. The Chinese have already responded by supporting their economy with the prospect of reducing tariffs on $75 billion worth of US imports. This means, in the short-term, there is unlikely to be any escalation in US-China trade tensions. The fall in economic growth means inflationary pressures are likely to be subdued, therefore, the major central banks will keep their monetary policy looser for longer and this will help support their economies and markets.