The coronavirus has spread across China and beyond at a rapid pace, which will cause an immediate significant reduction in domestic consumption with retail sales falling and there also being a slump in demand for travel and entertainment services.
We forecast first-quarter 2020 gross domestic product (GDP) growth in China will slow to 4.0 per cent, down 2 percentage points (ppt) from the last quarter of 2019.
We think the shock to growth will be as severe as seen during the SARS outbreak in 2003, even though the economy is seven times larger than it was 17 years ago.
"We think the shock to growth will be as severe as seen
during the SARS outbreak in 2003,"
This is mainly because today consumption contributes around 58 per cent of China's GDP growth, much more than the 35 percent in 2003.
Also, industrial production and manufacturing activities will suffer from extended public holidays and disruption to business given city lock-downs, and the travel and other restrictions actioned to try stop the spread of the virus.
The slowdown in China will also have global repercussions through the country's integration in the global supply chain and tourism. These spill-over effects could be substantial if the outbreak lasts longer than expected.
The effects will be most acute in Asia, where supply chains are tightly integrated with China, and economies are heavily dependent on final demand from China and Chinese tourism.
We expect Hong Kong, Vietnam, Taiwan and Malaysia will feel the supply chain impact most. Thailand and Hong Kong will likely feel reduced tourist arrivals most. However, the scale of impact will largely depend on the length of the disruption.
Overall, we expect the growth shock to be temporary. We anticipate a return to trend growth in China in the second half of the year as pent-up demand and increased production lead to a rebound.
Under our baseline scenario, we forecast that the coronavirus outbreak will lower China's full-year 2020 GDP growth by 0.5 ppt to 5.4 per cent with the expected support by a series of stimulus measures.
While the situation remains uncertain, the outcome could range from a 0.2-ppt fall (our best-case) to a 1.4 ppt (our adverse scenario case) decline in GDP .
For the global economy, we expect GDP growth will slow by 0.2 ppt to 2.3 per cent this year due to slowdown in China, given the latter's large share of world GDP (around 18 per cent of global GDP and one third of global growth in 2018).
