Author: Vedran Obućina

Analyst, journalist specializing in the Western Balkans and Middle East domestic and foreign affairs

How will coronavirus affect European economy?

Beijing-based Global Times and some Western media have called the coronavirus a "black swan" — a completely unexpected phenomenon that will cause great damage to the Chinese and world economy. If the epidemic spread around the world, it could cause not only great human casualties.
How will coronavirus affect European economy?

(©CDC/Alissa Eckert, MS; Dan Higgins, MAM, Public domain)

Uncontrolled developments could also trigger a global economic recession, due to the enormous impact China has on the world today. It is, therefore, no wonder that many countries are introducing emergency states to limit the spread of the virus, which killed 563 people in China by the time this article has been written, more than the bird flu in 2003. Although the epidemic has not peaked, most experts still believe in curbing the disease and avoiding recession. Still, there is no doubt that the economic consequences of coronavirus will be far greater than those caused by the bird flu (SARS), according to Global Times, which is close to Chinese leadership, recalling that the outbreak of SARS once cut China’s GDP by 1 per cent.

Decline of consumption and shutdown production

The coronavirus outbreak could hit the Chinese economy stronger than two decades ago and reduce its economic growth in the Q1’20 by two percentage points, due to a sharp decline in consumption, a key driver of the Chinese economy, writes Global Times. Interruptions to passenger traffic and the temporary closure of many factories in the Asian giant will first hit the service sector, including tourism, transport, hospitality and retail, the media estimates. Moreover, the epidemic will not only cut off the growth of Chinese industry but also disrupt global supply chains, which are largely focused in China. 28 per cent of world industrial production is located there. China is the country with the largest trade in the world, larger than the US. Numerous foreign companies based in China — Ford, Toyota, Ikea, Starbucks — have ceased their operations and airlines have suspended flights. According to IHS Markit, if the epidemic persists, many companies in the world will be left without components, which are mass-produced in Chinese factories, for their final products,. This would slow down their production. As a rule, companies have stock of components for up to two months of uninterrupted operation.

The future is still unknown

Kristalina Georgieva, the new chief executive of the International Monetary Fund, said that the new virus would „slow down” the economy at least „in the short term, while we don’t know the long-term consequences. We see some indirect impacts affecting production, value chains in the world that are affected by virus-induced disorders.” She added that the negative impact is spreading „to travel and tourism.” For example, transport and tourism companies in the world, and partially in Europe, could suffer financial damage as a result of reducing the travel of citizens scared of the spread of the infection. The Chinese are the largest travellers in the world, and their tourists abroad spend about USD260bn a year, double than that of the US, according to the World Tourism Organization.

Ms. Georgieva also confirmed that the effects of coronavirus would be greater than avian influenza, which spread to 29 countries in 2003 and killed 774 people. Avian flu slowed the world economy by just 0.1 percentage point. However, China made up only 4 per cent of the world economy at the time, and today it makes up 18 per cent, so the impact may be far greater, the IMF director warned. Businessmen are worried about the spread of coronaviruses because, at the end of 2019, they began to believe that the stagnant world economy had touched the bottom and that better days would follow. The world avoided a downturn in the economic recession last year, thanks to actions taken by the largest central banks — the US, Chinese, European, British and others — which began cutting interest rates last fall and restoring „printing money” to boost the economy. “So, the economic growth in 2019 was raised by 0.5 percentage points,” Ms. Georgieva estimated. Moreover, businessmen breathed a sigh of relief when in mid-January Washington and Beijing signed the first phase of the trade agreement to ease economic tensions. Business was exhilarated when realized that Brexit would not create abrupt trade disruptions, at least not this year. When all thought the worst had passed and the world’s economy had emerged from the dark forest, a „black swan” appeared in the form of a coronavirus, which began to erode optimism. “We’re not out of the woods yet,” Ms. Georgieva confirmed.

The emergence of the coronavirus is tricky because the growth rate of the Chinese economy slowed to 6.1 per cent last year. It is more difficult in the Eurozone, where the growth of economy has barely exceeded 1 per cent. The worst is in Germany, with the GDP increase only by 0.6 per cent last year. At the end of last year, the situation in Italy, France and Britain, the Europe’s largest economies, worsened. The impact on the economies of Central and Southeast Europe (CSE) as a whole, according to forecasts given by some banks, should remain negligible if the vigilant virus persists for a short time. If nothing else, the negative effects are likely to come indirectly through lower global growth due to a slowdown in China and increasing levels of uncertainty.

Where does the virus hit the most?

Certain sectors such as commodity producers (especially copper and steel) or global value chains that rely solely on inputs from China are more likely to suffer from production interruptions. Tourism is likely to face a slowdown, but not everywhere. CSE, on the other hand, as a net importer of goods, could benefit from lower prices. Several European countries have issued warnings advising citizens not to travel to China, and most of the airlines have suspended flights to China. Chinese authorities have urged the population to delay travel abroad and have also banned group travel around the country. Also, most factories and offices will remain closed for some time.

Although CSE countries are seeing an increasing number of Chinese tourists, their share of total tourism is still generally at the lower, single-digit percentile level. Therefore, the impact of even a significant drop in Chinese guest numbers would not endanger the CSE tourism sector.

The impact on China’s economy could be outweighed by the services sector. Fortunately, the value of CSE exports to China is negligible (about 1 per cent of total exports), which makes the region quite resilient to a possible slowdown in Chinese demand. On the other hand, the share of imports from China is much higher in the CSE than in the rest of Europe. More than a third of imports are final products, so reducing them would have a fairly neutral impact on economic growth in this region. The potential disruption of semi-finished imports is more relevant to the CSE economies, where high dependencies and a lack of substitutions could potentially lead to some interruptions or delays in production. The bulk of semi-finished imports are for computers and electronics.

Erste Bank experts say that thanks to high logistics optimization, CSE-assembled cars rely on components primarily manufactured in Europe, and a very small percentage (2.5 to 3.5 per cent) of the value-added of cars comes from China.

Volkswagen, BMW, Volvo, Toyota or Tesla — various car makers have extended a break in their manufacturing facilities in China, caused by the Chinese New Year’s extension. China’s largest refinery has cut production by about 600,000 barrels a day due to lower fuel demand. Stopping production in China to curb the spread of the virus can cause visible interruptions in copper and crude oil consumption, as well as steel consumption. The effects of demand on crude oil should be generally positive for CSE since all markets are in fact importers of primary products. If the spread of the virus is curbed at some point, industrial production could recover from a possible decline in the first quarter.

The German Institute for Economic Research (DIW) believes it is “too early to seriously analyse the economic consequences of coronaviruses,” DIW President Marcel Fratzscher said and added “If the virus spread in China and around the world is successfully curbed, then economic costs should be limited to a short-term decline in production in China.”

“But if production shutdowns will take longer, international supply chains would also be affected,” warns Klaus-Jürgen Gern of the Kiel Institute for the World Economy. “China, as a lifer, is significant to the rest of the world,” he reminded. Allianz economists warn that longer standstill and production shutdowns could break supply chains in the chemical, automotive, textile and electronics industries. International companies would no longer get the parts they needed and would have to find other suppliers or open new production sites.

Vedran Obućina is an analyst and a journalist specializing in the Croatian and Middle East domestic and foreign affairs. He is the Secretary of the Society for Mediterranean Studies at the University of Rijeka and a Foreign Affairs Analyst at The Atlantic Post.

(©CDC/Alissa Eckert, MS; Dan Higgins, MAM, Public domain)

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