Remain Deadly Calm At All Times, Part Two
On 30th January The World Health Organisation declared on a global health emergency. Nobody has died of Corona Virus in the US, but that country has declared (on 30th January) a public health emergency and denied entry to foreign nationals who have visited China in the preceding two weeks. Australia and Singapore have followed suit. New Zealand and Israel are denying entry to foreigners travelling from mainland China. Japan and South Korea have denied entry to anyone coming from Hubei province. Egypt, Finland, Germany, Indonesia, Italy and the UK have suspended passenger flights to mainland China. Mongolia has partially closed its long border with China. Today Hong Kong has said it will suspend ten of the thirteen border crossings with mainland China from midnight local time.
China has complained that the US has over-reacted and of “spreading fear.” Perhaps American public health officials remember being accused of not doing enough to stop the spread of H1N1 in 2009, when a reported 57 Mn Americans were infected, 257,000 were hospitalised and 11,690 people died. The US Centre for Disease Control estimated that in a ‘normal’ flu season, 200,000 people would be hospitalised and 36,000 would die, mostly those over 65 years old when infected. The outbreak of swine flu was unusual for starting in the Spring and running through the Summer, but it was not unusual either in the rapidity of its spread or its fatality rate.
The Wuhan Corona Virus is killing about two per cent of known victims, as a ‘normal’ human flu would, and appears to be spreading at a slightly faster rate. It has also emerged during more normal flu weather – cold and dry - which the regular human flu virus prefers so Summer. Wuhan Corona Virus may become a pandemic, because it’s impossible to quarantine the entire human race. The WHO has warned that closing borders could encourage unofficial migration, increasing the spread of the virus. But unless the virus mutates into something more lethal there probably isn’t cause to panic from a public health perspective.
The economic perspective is however already panicked. China’s stock markets are heading into correction territory, opening down nearly eight per cent when trading resumed today. Investors fear that the extended Lunar New Year holiday will reduce industrial output and they are right to do so. Each week the factories stay closed cuts their output by 1/52 for this year – nearly two per cent from a nominal full capacity output. Headroom and productivity improvements (e.g. increasing overtime) could recover some of the lost output later in the year when the public health situation has calmed down but it seems likely that Chinese GDP will take a hit in the secondary sector. The services sector will also take a hit as consumer activity accounts for nearly 45 per cent of China’s economic activity. People staying at home can still shop online, but they don’t use transport, hotels, catering or tourism services. Already we hear of the effects on global tourism of the Chinese staying at home over Lunar New Year.
To prime the economic pump, the Chinese government has announced around USD 170 Bn of relaxation in the credit markets, concluding increasing the amount of capital insurance companies can invest in stocks and shares. The government has limited room for manoeuvre. It can’t do much with the currency, which is already weakening as capital flows out of China looking for safer Asian havens like Japan. Raising interest rates to support the currency would run counter to the prevailing loose monetary policy. The government can’t do much with fiscal policy either as government revenues have been falling in real terms, as this chart shows:
THE TAKE AWAY
To spend its way out of an economic soft patch, China will have to increase either government or non-government borrowing. Already non-government debt is around 200 per cent of GDP the level at which Japan, the US and the EU have previously had banking crises. The Wuhan Corona Virus has emerged at a bad time as China’s fiscal and monetary policy responses to its effect on the economy are limited. Now that China’s GDP is around 16% of global GDP, and its exports and imports are so fully integrated into global trade, the commodity and shipping markets are bound to take a hit this year. Investors are already pricing that into commodity prices and the stock prices of commodity-related companies. It looks very much like, economically speaking, we will all catch this virus this time.