Virus outbreak comes at the worst time
The coronavirus outbreak is not the first time the world has experienced an infectious disease at pandemic level. The first well-documented pandemic was the Plague of Justinian that struck in the 6th Century. The plague killed 25-50 million people which was a lot given the population then.
In modern history, we still remember the 1918 Spanish Flu which, coincidentally, killed another 25-50 million people. More recent outbreaks are Sars n 2002-2003 and Mers in 2015. Both Sars and Mers resulted in fewer than 800 deaths and did not have much impact on the world economy. But this time, things could be different. Particularly for Thailand.
I have no knowledge of epidemiology and will not try to predict the level of infection and casualties. But as a footnote from a non-medical person, I am surprised to see such strong reactions from the Chinese government compared to the Sars outbreak which also originated in China (Guangdong province).
What I will focus on in this article is estimating the economic impacts of the Wuhan coronavirus outbreak. Since this is the onset of the outbreak and I have no knowledge of how this pandemic will play out, I will make the assumption that the outbreak will be similar to Sars which spread over 26 countries and infected about 8,000.
The Sars outbreak only created short-term damage for the Chinese economy and made no noticeable dent on the world economy. The Chinese paid little attention to the infectious disease as the economy enjoyed 11.1% growth in the first quarter of 2003. Then infections became serious and deadly, particularly in Hong Kong. The Q2 GDP growth rate plummeted to 9.1%.
Of course, that kind of growth rate was still quite high by any standard. By the third quarter, things returned to normal and the economy enjoyed double-digit growth of 10% again. After that, the Chinese economy kept growing and growing, peaking in Q2 2007 with 15% GDP growth. So much for the pandemic.
Nothing much happened then, so why should things happen now?
Firstly, the reactions of the Chinese government are totally different. The Chinese government almost treated Sars as a non-issue. No special treatment for disease control. The mainland Chinese public became aware of the disease when there was a massive outbreak in Hong Kong in March 2003. As said, the reactions were short-lived and all economic activities returned to normal in Q3.
But this time, the Chinese government has used every means in its power, almost to the point of over-reaction, to control the spread of the virus. Locking down 30 million people in the Wuhan metropolitan area. Stopping millions of Chinese from travelling abroad. These actions, and news from social media, have caused pandemic-level fear in China. All economic activities have been greatly affected beyond the Wuhan area.
Although it is too early to calculate economic numbers, I am sure that this time it will not cause just a small, temporary dent in GDP. I am curious to see the reaction of Chinese stock markets when they reopen after the Chinese New Year holidays. By the way, Chinese authorities have extended these public holidays for five more days.
If I had to put a scale on the panic level of Chinese consumers from a scale of 1 to 10, the Sars outbreak would be rated at 1 while the coronavirus spread would be more than 10.
Some might argue that the Chinese government is reacting strongly because of the lessons learned from Sars. What lessons? Sars caused 8,000 infections and 800 deaths. A small number compared to more than 250,000 traffic accident deaths in China per year. And the lesson from the disruption to the economy? Growth of 9.1% during the height of the outbreak.
Second, economic conditions are totally different. In 2003, the Chinese economy was robust. Economic growth rates were at double digits before and after the Sars outbreak. Therefore, the impact of a small pandemic could be overlooked.
But Chinese economic growth of 2019 was the lowest in 30 years, registering only 6.1%. Furthermore, the economy is currently threatened by the trade war and a high level of private debt. Even without the pandemic factor, the economy is likely to grow less than 6% on its own.
Most people think that the threat to the Chinese economy is only the US-China trade war. But that is a minor threat. The major threat is the high level of private debt. China has the world's highest level of private debt at 252.4% of GDP. The US and Thailand have about 150% of private debt to GDP.
To make things worse, 50% of private debt belongs to state enterprises which are normally inefficient. It will amaze readers that the number of state enterprises in China amounts to around 174,000. Now you see the problem.
Moreover, the outbreak happened during the auspicious time of Chinese New Year -- the most important period of spending for the economy. The negative psychological effects would lead to a drop in consumption and investment, even after the pandemic subsides. The first-quarter GDP figure will confirm whether my concern for China's economy is true or false.
Like China's, the Thai economy was solid in 2003. Furthermore, the trade relationship between Thai and China was not so strong then. The Sars outbreak thus had almost no impact on the Thai economy. In fact, Thai GDP growth was 7.2% in the Sars year of 2003 -- the best in a decade. Like China, again, the Thai economy is quite vulnerable at present. GDP growth was a low 2.5-2.6% in 2019, the household debt level touched 80% of GDP, and export growth was at -7.7% (November 2019).
A loud sneeze in China could cause the Thai economy to be hospitalised as 12% of our exports valued at over 900 billion baht go to China and 10 million Chinese bring 500 billion baht of tourism income to our economy.
If those two sources of precious income are cut by 20% or around 280 billion baht, one can expect no growth in the Thai economy this year. But if China-related income is damaged more than that, hmm. Let's not talk about it.
Chartchai Parasuk, PhD, is a freelance economist.