Even though the coronavirus outbreak isn't over yet, economists are already counting the damage. Research houses estimate that China's gross domestic product (GDP) growth in the first quarter of this year could be less than 4% -- a sharp drop from the usual 6%-plus growth rate. Of course, the economic impact won't be limited to China, as its GDP represents more than 20% of the world economy.
A sick China will definitely mean a sick world.
According to a major Japanese research house, Japan's GDP growth could slide by 0.2% if the outbreak lasts for a quarter, or by 0.9% if the outbreak lasts for a year.
Thailand isn't faring better as the country has close economic ties with China through exports and tourism. All research houses have cut their Thai GDP growth forecasts for 2020 from 2.7% to 2% or less. I heard through the grapevine that one research company is even warning of the possibility of negative growth.
Let me remind you that when these economists made their first round of downward adjustments of growth figures, the number of confirmed cases was probably around 20,000 and the death toll was less than 400. The most recent data shows the number of confirmed cases has jumped to 45,000 and casualties have exceeded 1,100. Life in China -- particularly in its major cities -- is still far from being normal. Therefore, further downward revisions are warranted.
Not even medical experts can predict the severity of this outbreak and when it will end. They all hope that it will last for only three months, just like Severe Acute Respiratory Syndrome (Sars) and Middle East Respiratory Syndrome (Mers) -- which means they are hoping the spread of the virus will taper off by the middle to the end of March. Unfortunately, there is no scientific evidence for that yet. But what is certain is that the Wuhan coronavirus has already broken records set by the 2003 Sars outbreak in terms of infections by a very, very wide margin.
Economists are welcome to keep re-estimating the impacts of the outbreak on GDP. As I said, there will likely be many rounds of revisions. However, the real concern for me is not the short-term economic impact but the long-term economic consequences of the outbreak. The Chinese government will surely pump large amounts of money into the economy and create many mega-infrastructure projects to shore up growth. But those measures will only work if Chinese consumers and investors do not alter their behaviour -- because such a disruption will likely lead to a permanent change of consumption and investment patterns, which would in turn change the course of long-term economic growth.
Before you get confused, let me give you an example. Let's say that one day, you witness a horrible road accident causing many casualties. Even though that accident does not involve you, it could change your driving behaviour immediately. You, for instance, could become a more cautious driver, or drive slower. Consumers and investors do the same when a big event happens in the economy. The event changes the outlook for the economy, and consumers and investors alter their consumption and investment patterns accordingly.
The first example is the Great Hanshin Earthquake of 1995. The massive quake caused Japan's stock market to plunge by over a thousand points in one day. The catastrophic event sent a clear signal to Japanese consumers -- that life was uncertain and they needed to save more. They did just that, consuming less and saving more. From 1995-2007, owing to a slowdown in economic activity, Japan's GDP shrank from US$5.33 trillion (about 166 trillion baht) to $4.36 trillion and real wages fell around 5%. Prices were also stagnant during that time. The quake triggered a decade-long "economic nothingness" in Japan.
Another big event that could have changed economic history is the 9/11 terrorist attacks in 2001. The event also sent a signal to Americans that life was uncertain and they needed to consume less and save more. A global recession thus loomed -- but before that happened and the world lost a decade like Japan, the US Federal Reserve Bank initiated "Operation Twist" to push interest rates down and stimulate consumption. Despite the efforts, US GDP growth dipped to 0% in 2001 and it took three years before growth resumed its normal pace.
Thailand has also experienced a big event that changed behaviour, namely the Great Flood of 2014. While Thai consumers' behaviour wasn't really affected, it had a profound effect on foreign investors -- especially the Japanese. The flood alerted investors that it was unwise to concentrate production in one country, as it could put their global supply chain in jeopardy. Investors heeded the warning sign by diversifying investments to nearby countries. Now you understand why Thailand has seen almost zero investment growth since then. One could even call it "Thailand's lost decade of investment".
The virus' long-term impact on the economy -- both China's and the world's -- will start to become apparent after the outbreak ends. The outbreak is yet another signal to consumers that once again, life is going to be uncertain and that consumers need to consume less and save more.
Even without the epidemic, Chinese consumers and corporations are already at risk from high levels of debt. The outbreak is a clear wake-up call for the world -- the myth of China's great economic might has been shattered. Its people and the world will soon realise that China is vulnerable, rather than invincible.
The epidemic affects foreign investors as well. Many factories are currently operating at well below normal capacity. The global supply chain is already disrupted. Japan's Nissan Motors Co has had to shut down its Kyushu factory for a few days due to a lack of supplies from China. This is quite unprecedented, and no one can tell when normal operations will resume or whether they will ever fully resume.
If one wants to look at the full impact of the virus outbreak, one has to look beyond 2020. There is no doubt that China's economy, and those of countries closely associated with China, will be in bad shape this year. But an analysis of long-term impacts will have to wait until the smoke clears. The one thing about China, is that it is not a fully free market economy and the government has immense power over the private sector. As such, we might see something drastic from the Chinese government, like business interventions and/or a sharp depreciation of the yuan.
Chartchai Parasuk, PhD, is a freelance economist.