PAGE Blog Business Weekly Magazine
The governments and central banks world over readied more emergency measures to tackle the economic impact after spreading coronavirus on Friday, helping financial markets pare some of their steep losses, while more major events were canceled or postponed. US president even declared national emergency and set $50 billion fund to tackle the contagious disease. Till date (Friday March 14) about 138,000 people are affected worldwide and over 5,000 died, according to available reports.
Experts warn that due to a lack of testing and unreported cases, many more people may be affected by the outbreak that emerged in the Chinese city of Wuhan late last year and now almost all world countries are lockdown for trade, travelling, gathering, even schools and institutions and public places are closed making fear of economic loss.
Impact on major economies
Economists are looking at coronavirus outbreak in context of SARS epidemic of 2003. The SARS epidemic is estimated to have slashed 0.5 percent to 1 percent off of China’s growth that year and cost the global economy about $40 billion (or 0.1 percent of global GDP). In that year China’s economy accounted for roughly 4 percent of the world’s GDP; which is now 16.3 percent. If the coronavirus has a similar effect on China as SARS, the impact on global growth would be worse. Moreover, after years of rapid economic development, China’s growth is weaker than it was in 2003. Currently China’s growth stands at 6 percent, the lowest it’s been since 1990.
The coronavirus spreads more quickly than SARS, but, so far, seems to have a lower mortality rate. For its part, China responded more quickly to the coronavirus outbreak than it did with SARS, employing unprecedented confinement measures in areas such as Wuhan. The economic upshot from the coronavirus could clang China’s economy further and reduce global growth.
In China, which is a month ahead of the rest of the world in terms of the outbreak, a survey of purchasing managers shows that manufacturing output in February sank to its lowest levels since factory bosses were first surveyed in 2004. It seems likely that GDP would shrink down in the first quarter, for the first time since the death of Mao Zedong in 1976.
With the spread of the coronavirus, the United States is facing a potential “black swan event”—an extremely rare and unpredictable incident that has potentially severe consequences.
While the human cost of the outbreak continues to rise and cannot be undermined, it is also pertinent to discuss the global economic impacts of this contagious infection. In first world countries, most of the economic effort has been directed towards calming financial markets. On March 3rd US’s Federal Reserve cut rates a fortnight before its monetary-policy meeting, and by an unusually large half-a-percentage point. The central banks of Australia, Canada and Indonesia have also acted. The Bank of England and the European Central Bank are both expected to loosen policy, too. Lower rates will ease borrowing costs and shore up sentiment. However, monetary policies cannot repair broken supply chains. That is the obvious reason why stock markets failed to revive after the US Federal Reserve cut.
It would be better to support the economy directly, by helping affected people and firms pay bills and borrow money if they need it. For individuals, the priority should be paying for health care and providing paid sick leave. The Trump administration is considering paying the hospital bills for those with the virus. Japan’s government will cover the wages of parents who stay at home to care for children or sick relatives; Singapore’s will help cab drivers and bosses whose employees are struck down. More than one in ten American adults would be unable to meet a $400 unexpected expense, equivalent to about two days’ work at average earnings, according to a survey by the Federal Reserve. Fearing a hit to their pockets, people could start to hoard cash rather than spend, further worsening firms’ positions.
Analysts at Goldman Sachs are expecting both to fall into recession in the first half; the euro area as a whole is expected narrowly to skirt one. Forecasters are expecting in a sharp rebound in the second half of the year. But it all depend on the extent to which the virus spreads and on the measures taken to contain it. Authorities in France, for instance, have banned large-scale indoor events. Some tourist attractions, such as the Louvre, have closed. That will slow the spread of the virus. But it will also drag down output. Tourism accounts for 7% of France’s GDP and around 12% in Portugal and Spain.
Investors are expecting the European Central Bank to cut interest rates in coming months. So far governments have shown some eagerness. Italy has promised to spend euro 3.6 billion ($4 billion) on health care and tax cuts to help companies facing the most disruption. France’s finance minister, Bruno Le Maire, is urging more spending to cushion the blow to the economy. However, the German government has so far done little.
Analysts from Deutsche Bank predict that euro-area GDP growth could fall at an annualized rate of 4% in the second quarter if there is a more severe outbreak. The prospect of job losses and bankruptcies might soon pressurized governments to do more. Many workers do not have big safety buffers either. They risk losing their incomes and their jobs while still having to make mortgage repayments and buy essential goods. Modelling the resulting hit to economic activity is no easy task.
Impact on Indian economy
Until recently, India was the world’s fastest-growing large economy. But growth has tumbled in the past two years, reaching a six-year low of 4.7 per cent in the last quarter of 2019, according to revised data from the national statistics office. The prolonged slowdown has led to plunging investment, job losses and increasing poverty. This slowing down is having no real sign of recovery.
The hopes of a rebound are now fading as the coronavirus spreads, prompting agencies and analysts to cut their growth forecasts for the country.
It has been estimated that India’s gross domestic product would grow at 5.1 per cent in the 12 months to March, down from its previous estimate of around 6 per cent. India’s economy is less integrated with China than those of many of its Asian neighbors.
China is a vital supplier to large industries such as car manufacturing and pharmaceuticals, which are starting to feel the pinch. India sources more than 70 per cent of pharmaceutical ingredients, around a quarter of car parts and the bulk of supplies for electronics from China. Most of the Pharmaceutical ingredients bought are from suppliers around Wuhan — the Chinese city where the virus outbreak originated and where economic activity has ground to a halt. An attempt to obtain raw materials from Singapore was also hampered after it could not find ships to transport the cargo.
The stock market fiasco
Stock markets everywhere are experiencing major declines amid investor fears. There’s a prolonged economic slowdown around the world as the infection continues to spread. Since it’s outbreak in December 2019, the trickledown effect of chaos in the Chinese economy is affecting equity markets, production lines and supply chains around the world. Pakistan has been no exception. The IMF mission expressed concerns over the negative impacts of coronavirus on Pakistan’s economy as a spillover from the slowing down of the Chinese economy. IMF projected Pakistan’s GDP growth at 2.4 percent and inflation at around 11-12 percent for the current fiscal year.
Pakistan economy
The outbreak has already had an impact on the $62 billion CPEC, with construction work delayed during the second phase of the project. The impact on Pakistan’s economy is dependent on the time duration of curtailing the intensity and spread of the disease in China as well as globally. However, the slowdown in the Chinese economy, the halt on production in China as well as the closure of trade routes may led to believe the economic impacts of the corona would hypothetically be among the worst for its neighbors, like Pakistan.
As part of the Pak-China free trade deal agreement, products of the value of around $17 billion are imported from China. It is around one fourth of the country’s overall imports. On the other hand Pakistan exports to China is around $2 billion. It has been expected that Chinese yuan would depreciate by 3-5 percent. This might decline in Pakistan’s import bills.
Moreover, Pakistan’s textile industry and exports may increase as there might be interruption in supply chains from China. Pakistan government’s quick decisions may pervade the required incentive into its crawling textile industry. It may include reduction in power tariffs and establishing proper supply chains for raw materials. As it is said “indecision is worse than bad decision”, Islamabad is required to hammer at the right place and at a right time; so converting threats into opportunities.
The recent plunge of points in the KSE-100 index, following a slump in global stock markets, was a clear indication that market participants were bracing for a much harder landing for Pakistan.
According to Dun & Bradstreet, a US-based commercial data, analytics and business insight provider, five million companies are expected to be affected globally by the virus. Some analysts believe that following the outbreak of the virus, many companies would rethink their sourcing strategies.
The Asian Development Bank (ADB) has warned that Pakistan’s economy may suffer a loss of up to $5 billion in the worst-case scenario of which $1.5 billion loss will be incurred in the agriculture and mining sector, $1.94 billion in business and trade, $253.7 million in hotel and restaurants, $671 million in light and heavy engineering, and $565.6 million loss in transport services. The report also highlights that this loss would plunge Pakistan’s GDP by at least 1.57 per cent and trigger 9,46,000 job losses.
