On Coronavirus & the global economy
David Skilling
7 February 2020
The economic impact of the coronavirus continues to be marked up as the impact on Chinese growth, that on other economies in the region, as well as on the global economy becomes more evident. Markets have sold off, and there are material risks to the 2020 economic outlook.
Although the mortality rate looks to be lower than SARS, the economic impact is likely to be larger because of the apparently higher infection rate as well as the much larger size and extent of integration of the Chinese economy. Tourism flows and retail spending are down, global supply chains have been disrupted, and so on, due to the second-round effects of government responses to the virus.
In addition to the human tragedy and the economic costs, this episode illustrates three emerging structural features of the global economy – which will remain in place even when this crisis is resolved.
First, the coronavirus experience clearly highlights that China is a source of systemic risk to the global economy. China is the second largest economy in the world in USD terms (~16% of world GDP), and accounts for about one third of global growth. China has provided meaningful support for the global economy over the past decade. But this process also works in reverse – a negative shock in China transmits through to the rest of the global economy.
And China has some unusual characteristics. The rise of China means that for the first time in modern economic history the world’s largest economy will likely soon be an emerging market, with the associated institutional properties and higher risk profile. Indeed, China’s political risk profile has risen since President Xi removed the constitutional limits on the term of the Presidency. The increasing centralisation of authority and the absence of checks and balances creates meaningful new political risks to China’s outlook.
There are a range of emerging stresses on China’s social and political stability. And there are political risks to the CCP if the coronavirus is not managed effectively, as even President Xi acknowledged during the week. Indeed, the way in which China has managed this crisis to date has reinforced some of the pre-existing concerns around trust and transparency. The death yesterday of coronavirus whistleblower doctor Dr Li Wenliang is causing widespread anger.
Economies that have been exposed to China have done well as China has integrated into the global economy over the past two decades, from Singapore and New Zealand to several small economies in Europe. But the growing risks from China are weighing on these economies: trade wars, a structurally slowing Chinese economy, and now the coronavirus. We should expect higher levels of volatility in the global economy, as a relatively high-risk China economy becomes a larger part of the global economy.
Second, the coronavirus shows that Asia more broadly faces a series of challenges and risks to its outlook. Asia has been the stand-out growth story of the global economy over the past several decades, with successive waves of Asian economies converging towards the income frontier.
It is straightforward enough to make the argument that the future is Asian. It is a deeply plausible argument, given the shifting centre of gravity in terms of global GDP and population as well as the growth in innovative activity and the development of global companies from Asia. But this Asian transformation has occurred in an environment of strong global growth, globalisation, and the absence of major geopolitical stresses (no major wars over the past few decades).
Looking forward, Asia faces an array of structural challenges. Public health issues like the coronavirus are just one example. Asia is also at the centre of many of the world’s most intractable geopolitical disputes, from India/Pakistan, to the Korean Peninsula, as well as the Taiwan Straits and the South China Sea. And the social compact is under growing stress in many economies in Asia, as growth slows and pressure mounts to deliver public goods and services.
Asia is also highly exposed to climate change: rising sea levels will impact on coastal mega cities, rivers are drying up, and rising temperatures are impacting on agriculture. The strength of social and political institutions is highly variable across Asia, which will complicate the task of dealing with these challenges.
Third, the international response to the coronavirus reminds that the open, liberal model of globalisation is at deep risk. Barriers to the cross-border movement of people from China have been established, which will have flow-on impacts to global supply chains. There are, of course, good public health reasons for countries to close their borders to stop the spread of the virus from China. And there are political pressures in many countries to be risk averse, erring on the side of caution.
But the coronavirus is reinforcing the broader political mood towards erecting barriers on global flows (trade wars, focus on ‘taking back control’, and so on). From intense globalisation with far flung supply-chains, technological and political dynamics are pushing towards a more regional global economy. Inward-looking policy postures have growing political support in some large economies. At one extreme of this sentiment, US Commerce Secretary Wilbur Ross crassly suggested that US firms should bring jobs back to the US in response to the coronavirus.
The disruptions to international travel and supply chains will strengthen the tendency towards regionalism, with countries and regions closing their borders. Some of this will relax once the virus is under control, but this experience is likely to reinforce the movement towards shorter supply chains and less open policy settings.
Overall, the coronavirus outbreak – and the impact and policy response around the world – provide a perspective on the outlook for the global system. We should expect a more volatile global economy that is subject to significant economic and political risks, a more muted economic contribution from Asia to the global economy, and globalisation with more frictions in place. The 2020s are not off to a great start.
Dr David Skilling
Director, Landfall Strategy Group
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