Will China’s coronavirus epidemic tip the global economy into recession?
–
The 2019nCov epidemic, which has become an international health emergency, now has more dead victims than SARS in 2002-2003, although at this stage the mortality rate is lower than it was then (2% against 10%). The Chinese authorities have decided to extend the “New Year celebrations” until February 9, in order to limit travel to and in urban centers. Border closings and movement restrictions are increasing. The most recent, and probably the most symbolic, is Hong Kong, where the authorities have been pressed to close access to the territory by the medical profession. At the opening on February 3, the markets registered the largest decline since 2015; the currency fell below the 7-yuan-to-dollar threshold and oil prices continued to fall. For its part, the International Monetary Fund has issued a warning about the world economy, due to the weight of China, almost 5 times greater today than it was 20 years ago.
Of course it is still too early to assess the human and economic consequences of the coronavirus, because these will depend on the scale, severity and duration of the crisis, knowing that the peak of the pandemic is not yet achieved.
China likely to lower targets
growth, and put it under the symbolic threshold of 6%.
The epidemic affects an already weakened, if not sick, body. For more than a year, China has faced a major industrial recession and has been trying to deflate an over-indebtedness crisis. To these evils were added a pandemic of swine flu, the revolt in Hong Kong – now in recession – of the elections hostile to Taiwan and the humiliating “phase 1” of the trade agreement with the United States, which the President Chinese did not want to sign in person. The pandemic certainly heightens this growing distrust of China and its government. In the country itself, critics of the authorities are crossing the barrier of social media censorship. Conversely, can we durably put a city of 11 million inhabitants in quarantine and even confine an entire province without incurring revolt movements? The epidemic becomes the pretext for an increased control of the population.
China is likely to lower its growth targets to below the symbolic 6% threshold. But will that be enough to give credibility to overly manipulated statistics? On the other side of the Pacific, President Trump has found the perfect scapegoat for the already marked slowdown in US activity and investment. Does he risk losing an electorate still predominantly inclined to believe that America is doing better? Will Europe remain entangled in its national differences? Energy and commodity producing countries will again be hit by falling demand and prices. On the economic level, this epidemic only accentuates the general trend of the economic slowdown already underway. The low point was to be reached in the first half of 2020. But if the crisis were to extend and last beyond the summer, the hope of a rebound would vanish. This scenario would rekindle fears of shortages, cascading bankruptcies and further swelling of private and public debt.
Markets continue to trust each other
at the Central Banks which certainly keep an eye on things.
In the longer term, the situation raises other questions. Will the globalized world close? The treatment of the crisis revealed if necessary the degree of integration of the world, the reverse of which would be for some the more frequent crossing of the barrier of species. After the “trade war”, the epidemic could help accelerate relocations outside of China and the restructuring of value chains. But for whose benefit? The countries of the Asia Pacific zone? Can we imagine a mass “re-industrialization” in the United States and in Europe? Will it be a sign of a move upmarket or on the contrary that of a protectionist withdrawal generating increases in production costs? The Trump administration appears poised to implement new customs barriers by targeting products from countries whose currencies are alleged to be undervalued.
For the moment, the markets seem to be leaning towards a controlled and circumscribed crisis in China, a temporary drop in production and stocks, followed by a rebound and the continuation of the country’s economic transformation, while the PBOC1 injects cash and lowers its key rate. What is more, the markets continue to trust Central Banks, which, while watching over the grain, are increasingly worried about the effectiveness and impact of their “remedies”.
As in the fable2, “They would not all die but all were affected”, this new coronavirus accentuates the difficulties of China to transform its economic model, while the rest of the world will have to adapt to this new deal.
–
