• The Invisible Hand

Economic Impacts of the Coronavirus

Updated: Feb 20

A humanitarian crisis is occurring in China, yet it is also having deep economic repercussions.

The outcome of the Coronavirus (COVID-19) outbreak is still uncertain, but undoubtably it will have major impacts on the Chinese and global economy. Li Wenliang first warned about the virus on the 30th December 2019, by February 7th 2020 he was dead and on the 17th February over 70,000 people have been infected and there are over 1,500 deaths. Viruses are highly unpredictable so it is hard to evaluate long-term effects of the virus although it has already caused plenty of damage.

A similar outbreak occured in China in 2003 known as SARS, but at the time China only made up 4% of global GDP- now it is 16%. The total cases of the SARS virus was 8,098 people, while COVID-19 looks likely to infect over 100,000 people. Clearly the possible threat to China and the global economy is much greater now. There are three main channels of economic damage from the virus: transport disruption, employment disruption and financial risk. All pose the likelihood of billions in economic damage.

Transport is vital in connecting economic agents and allowing trade to occur which all economists know is the most important driver of welfare improvements. Travel restrictions and closed borders disrupt the international trading network which is currently anchored in China. Seven out of the top ten busiest ports are in China and they are by far the largest exporter. Transport disruption within the country reduces the mobility of labour. It is much harder now to migrate to where work is available, especially if you live in the Hubei province. In the past couple of weeks tourism has been wiped out and airline companies are facing heavy burdens. Shares in Air China are down 17% since the start of the year. In major cities tourist attractions have been closed to prevent the spread of disease such as the Forbidden City in Beijing and busy sections of the Great Wall of China. In certain areas tourism can be a key source of revenue for workers who may rely on the seasonal income. However, fortunately the virus has occured in the winter so the peak tourist season has not been hit yet, but undoubtably tourists will not be so eager to visit China. The same is of course true in both directions. There are restrictions on Chinese people visiting other countries which may mean they stay in the country and spend more money in the domestic economy. Therefore, the net effect on tourism could be small than expected.

Secondly, the suspension of businesses, shops and restaurants means less economic activity is occurring. Starbucks has closed half of its 4,000 branches in China, for example. This means consumer spending is down and more workers are made temporarily idle so a negative output gap occurs. Every day off-work is a loss of output equal to the sum of what all these workers would have produced if they had been at work.

Finally, there is a risk of a financial shock from the outbreak if the confidence of investors is hit by worrying reports of the virus’s spread. Within 10 days the Dow Jones fell by 3.22% when the severity of the crisis became apparent and the Hang Seng index fell by 8.62%. China is the source of many key inputs in major firms such as Apple so problems in China can spread to firms which on the surface seem to be resistant to changes in China. In Japan Nissan have had to close a factory because they cannot get car parts from Wuhan which is a car manufacturing hub. The US is a particularly large importer from China. Stock markets always tend to be jumpy around major news stories and there is a risk that a small shock could lead to a prolonged downturn. However, the fall has been relatively small and short-term so far. The Dow Jones has already fully recovered from the shock and the Hang Seng index is only 3.77% below where it was before the corona virus was first identified. It is rare that such a small fall in stock markets could have more significant macroeconomic impacts.

So far this post has only discussed the costs that have been faced so far, not the possible future effects. There are however quite a few reasons for optimism. Without any controls a virus would be expected to grow exponentially since the rate of spread would be proportional to the size of the infected population. However, this has not occurred which suggests that public health measures are effective. Also the rate of new infections has been decreasing despite a recent correction and the number of recovered people is over 11,000 and growing quickly. The centralisation and authoritarian nature of the Chinese state has made it easier to contain the virus since they can organise resources faster and control the movement of people more effectively. Countries like Britain could never contain a city like London which China has done with the largest city of Wuhan.

The economic impact has also been cushioned by several factors. The outbreak began primarily at the start of the lunar new year so most people were already out of work and businesses were closed. Therefore, it did not move factors which would usually be active into inactivity. Also the government has responded with fiscal stimulus to raise confidence in financial markets and avoid a growth slowdown. This includes slashing tariffs on American goods to reduce export prices and possibly in the hope that America would respond in the same way.

Until now the effects has not been too disastrous and the Chinese government has acted swiftly to protect the economy. Much of the effects remain uncertain, but there are reasons to be optimistic. Hopefully now the virus has stabilised, in a few months it will be a brief moment in China’s history and they will be back on track to becoming the world’s largest economy.

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