A leading currency analyst has warned that the potential impact of the Wuhan coronavirus on the world economy has been understated, with Australia among the countries that will see an especially sharp downturn in growth.
Sean Callow, a senior currency strategist for Australian-based Westpac Bank, said liquidity pumping by central banks and measures to contain the spread of the virus had calmed stock markets, but it is likely a false sense of security among investors.
“We wish we shared the same level of optimism,” Callow said in a market briefing. “While trying to forecast the economic impact of the novel coronavirus is fraught with issues, we have slashed our growth forecast for China this year to 5.3% from 5.9%, with downside risks. East Asia will be hit hard, with growth revised down to 3.3% from 3.7%,” he added.
Rating agency Standard & Poor’s reduced its China forecast from 5.75% to 5% on February 7 and predicted the slowdown would have a global impact. London research group IHS Markit said it expects world gross domestic product (GDP) to fall by 0.8% in the first quarter and 0.5% in the second.
Severe acute respiratory syndrome (SARS), which has a similar genetic signature to the current viral outbreak, and also originated in China, trimmed 0.5% to 1% off the world’s growth in 2003. But China accounted for only 4.2% of the global economy at that time; now it contributes 16.3% of global GDP.
Callow believes the first shock will be an “abrupt” decline in commodity demand from China, which will cause “material damage” to countries that rely on resource exports. There are already news reports that Chinese steel mills will cut output by 30%, and that its oil demand has plummeted by 20%.
Australian liquified natural gas (LNG) producers, including Queensland Curtis LNG and the North West Shelf venture, are expected to be among those hardest hit by China National Offshore Oil Corporation’s (CNOOC) force majeure declaration for certain pre-booked LNG deliveries in February and March.
Almost half of China’s LNG imports come from Australia, according to Poten & Partners, a global brokerage, energy consulting and business intelligence company.
Mining powerhouse Australia, which sent 34.3% of its exports to China in 2018, mostly in the form of iron ore and coal, is in the first tier of nations with big exposure to the Chinese economy. About 23.6% of Australia’s imports also came from China, and A$63.5 billion (US$42.3 billion) of investment.
Australia trade data for 2018-19 showed 20.5% growth in two-way trade with China, with Chinese markets representing 26.4% of total trade. Exports to China grew by 23.9% and comprised 32.6% of total exports, over the same period.
Moreover, there are indications that Australia fared relatively well amid the US-China trade war because China switched from US to Australian suppliers for some goods.
Chinese studying at Australian colleges contributed A$11.7 billion (US$7.8 billion) in direct income in 2018 and A$4.1 billion (US$2.7 billion) in travel expenditure. About 25% of all international students come from China, but they have been unable to join classes due to government travel bans.
With other travelers included, China provides 15% of all tourists and A$12 billion (US$8 billion) of tourism-related revenues, easily the biggest source of visitors. Tourism represents around 3% of Australian GDP. As of February 10, Australia had 15 confirmed coronavirus infections.
The Center of Independent Studies, a think tank, estimated that three of the biggest universities would each lose more than A$100 million (US$66.7 million) if enrollments from China declined by 25%, a fall it characterized as “catastrophic” result.
The Reserve Bank of Australia (RBA), the central bank, has acknowledged that the virus will do more damage to the economy than Sars, which cut growth by 2% in one quarter but had no lasting impact on the economy.
“Our links with China are much more extensive than they were, the Chinese population is much more mobile than it was in 2003 and the Chinese economy in 2003 was growing very strongly,” RBA governor Philip Lowe told an economics committee in the lower house of parliament.
“The potential risk to the Australian economy I think is bigger than Sars and the truth is really none of us know how this is going to play out.”
Growth has already been hit badly by bushfires that have destroyed more than 2,000 homes and burned out much of New South Wales, Victoria, Queensland and South Australia since September. They are expected to rub 0.2-0.5% off 2020 growth and cost at least A$5 billion (US$3.3 billion).
Nonetheless, the RBA is sticking with its revised forecast of 2.75% growth for 2020 and 3% in 2021, arguing that the impacts from the virus and fires will both be short-lived. While the bank expects an initial slowdown, it predicted rebuilding from the fires would provide a lift in the second half.
Westpac is more pessimistic, forecasting only 1.9% growth in 2020, with a zero expansion in the first quarter. It had earlier forecast 2.1% growth this year.
Melbourne Investment manager Damien Klassen said the disruption to supply lines meant the impact would be much greater than many expect.
“When you look at how this will affect other countries, what their exposure is to China, how big the economy is, what type of companies it has, then Australia ticks a lot of the boxes,” he told The Guardian. “In terms of which countries will be most affected, we’re right up there.”
“The economic impact might be enough to force the world economy into recession. I don’t know what will trigger the end of the cycle but there’s a pretty good chance that knocking out half of China’s GDP for six months is going to do it.”