BlackRock Investment Institute

Macro insights

Assessing the risks to growth from the coronavirus

We view the outbreak of the coronavirus in China as a temporary local shock with global repercussions. The impact still has to show up in various activity metrics, including our proprietary GPS indicators. Disruptions to travel, hospitality and retailing will likely cause a sharp slowdown – albeit temporarily - in China’s GDP growth. The ramifications for the rest of the world will likely depend more on the hit to private sector sentiment, additional travel restrictions and potential propagation along global manufacturing supply chains.

China comparisons

A common starting point to analyse the potential impact of the spreading of the virus on the economy has been to look at the Severe Acute Respiratory Syndrome (SARS) epidemic in 2003. Yet we see this comparison as somewhat misleading: China’s economy is more than twice as big now as then and makes up a much more significant share of global growth. See the chart above. China is also at the heart of many globally integrated supply chains. Foreign exposure to final demand in China is significantly higher larger than it was when the SARS outbreak occurred. At the same time, the countermeasures taken to contain the outbreak are faster and more draconian this time. In our view, these measures taken are probably the biggest driver of the macroeconomic impact of the virus outbreak.

The People’s Bank of China has already cut interest rates and injected liquidity. Emergency fiscal spending measures and a cooling in global trade tensions should help to cushion the impact of the outbreak. Any hit to manufacturing production is likely to reverse quickly once the virus is under control. The services sector will likely struggle more to make up for lost activity. The virus outbreak calls into question an assumption that Chinese authorities will not embark on a large-scale economic stimulus to boost growth. Yet we believe policymakers will still want to steer the economy away from a credit-intensive growth model to a more consumption-driven one. As a result, any policy easing will likely be reactionary rather than aggressively proactive. But we still assume it to be enough to stabilize growth in China.

Historically, virus outbreaks have had limited impact outside a small number of local sectors such as tourism, hospitality and retailing. Together with a cooling in trade tensions and easier financial conditions, this should ensure that growth will be edging higher in the course of 2020. But the recovery in activity could potentially be delayed. For financial markets, the outbreak is likely to be a high impact – but short-lived – event. At this stage, it is unlikely to have a major impact on the medium-term macro outlook.