【COVID-19】新冠肺炎疫情对中国经济影响有限 - 2020-03-09

Li Feng and Hu Hao
The novel coronavirus outbreak in January this year would have a greater impact on the consumption side, and the production side would also withdraw to a certain extent. If there is no extreme deterioration, which means the epidemic can be effectively controlled in the first quarter, then with the country’s stepped-up macroeconomic policies, the economic impact for this year is expected to be limited, and the overall situation will remain good. GDP growth in the first quarter is estimated to be 4.9% (optimistic), 4.4% (neutral) or 3.8% (pessimistic). Economic growth is expected to gradually recover from the second quarter and a rebound is expected in the second half of the year. The annual GDP growth rate is expected to be 5.7% (optimistic), 5.6% (neutral) or 5.5% (pessimistic).
Limited impact on GDP growth, a rebound is likely in Q2
The COVID-19 epidemic is similar to the SARS epidemic in 2003. Both of them involve coronavirus infections. The SARS was seen as a relatively serious epidemic in China after 1949, and a total of 8,096 people were infected worldwide. The SARS epidemic began to break out on April 15, 2003. An inflection point occurred in mid-May, and the outbreak lasted about one month.
During the SARS outbreak, the growth rate of GDP in the second quarter fell by 2 percentage points, from 11.1% in the first quarter to 9.1%, representing a drop of 18%. But in the third quarter, growth started to pick up. In terms of industries, the primary and secondary industries rebounded in the third quarter, and the tertiary industry recovered in the fourth quarter.
GDP growth during SARS
Considering that the incubation period for intergenerational infections of COVID-19 is 14 days, we set optimistic, neutral and pessimistic assumptions based on integer multiples of the incubation period. The number of officially confirmed cases began to increase explosively on January 23. According to the most optimistic estimate, the inflection point occurred 28 days later (the end of the incubation period for second-generation cases), which means the outbreak would have been effectively controlled in late February. Under the neutral estimate, the inflection point occurred 42 days later (the end of the incubation period for third-generation cases), which means the outbreak would have been effectively controlled in early or mid-March. Under the pessimistic estimate, the inflection point occurred 56 days later (the end of the incubation period for fourth-generation cases), which means the outbreak would have been effectively controlled at the end of the first quarter.
With reference to the impact of SARS on the economic growth rate, the inflection point in the SARS epidemic occurred on Day 28, and the growth rate dropped by 18% in the second quarter. Based on the inflection point at Day 28, GDP growth rate would have dropped 9% if the inflection point was delayed for every single 14 days (the incubation period for first-generation cases). As we gauge the impact of COVID-19 on first-quarter GDP based on 6% GDP growth for the whole 2020 estimated before the outbreak, the GDP growth rate in the first quarter is estimated to be 4.9% (optimistic, with an inflection point at Day 28), 4.4% (neutral, with an inflection point at Day 42), or 3.8% (pessimistic, with an inflection point at Day 56). The economic growth rate is expected to show signs of recovery in the second quarter, and will gradually rebound in the second half of this year.
In general, although the epidemic would affect the economic data in the first quarter to some extent, it won’t change the overall stability in China’s economic development. If we use the impact on economic growth in the first quarter to calculate the impact for the whole year, the annual GDP growth rate is expected to be 5.7% (optimistic), 5.6% (neutral), or 5.5% (pessimistic).
A major impact on the consumption end
China’s economic data has improved since the fourth quarter of last year, and the market expected an upturn in the first and second quarters of 2020. Currently, however, the outbreak will affect the economy from both the consumption and the production ends.
In light of consumption, merchandise sales and the service sector have already been hard hit. Spring Festival is traditionally the prime time for sectors such as tourism, hospitality, catering, film and television, entertainment and transportation to boom. But business activities and revenues have been slashed due to the outbreak. However, medical supplies and daily necessities in the consumer sector could buck the trend during the epidemic. When the epidemic comes to an end, consumption will see a V-shaped rebound, which is likely to significantly spur economic growth in the second quarter.
Regarding inflation, CPI may be disrupted to some extent during the epidemic. Nevertheless, as the outbreak would generally dampen consumption, inflation tends to remain at moderate levels. But as production normalization lags behind, CPI is expected to pick up to some extend after the epidemic ends. This is comparable to the SARS period when CPI rallied after staying at low levels.
CPI Readings during SARS
A certain degree of slide on the production side
Affected by the epidemic, the return of workers to cities and the resumption of factories were delayed. Sectors like manufacturing, real estate and infrastructure investment were temporarily halted as businesses shut down and production contracted in the short term. The first quarter is expected to see production fall by a certain margin.
From the perspective of inflation, due to the sluggish demand for industrial products, PPI will plummet during the epidemic period. And it is expected to be back on the upward track only at a later phase of the post-epidemic period, given the time-lag in the restoration of supply chain. For example, after SARS ended, PPI returned to the upward track only in May.
PPI Readings during SARS
Prevention of major impact on exports due to the spread of the epidemic
Except for some key areas, the current epidemic remains preventable and controllable in China. Therefore, China has not yet been identified as an “affected area” by other countries and international organizations. Once it is declared by the WHO as an affected area, exports may face great impacts. As the proportion of export to China’s GDP is as high as 20%, China should try to avoid the further spread of the epidemic and refrain from being defined as an “affected area.”
The proportion of merchandise and service export to GDP in China
Economic rebound expected in H2, with various policy instruments of macroeconomic adjustment available
In the face of current difficulties in related industries, relevant macroeconomic policy adjustments may be rolled out in advance after the epidemic, charting this year’s course of economic development that opens low and closes high. This year marks the last year of the 13th Five-Year Plan, and a decisive one for securing a victory in building a moderately prosperous society in all respects. Policymakers have plenty of room for fiscal and monetary expansion.
In terms of fiscal policy, the issuance of special bonds by local governments, the role of the three major policy banks, and the increase of deficit ratio can all serve to drive economic growth after the epidemic. In terms of monetary policy, there is still considerable room to reduce short-term as well as medium and long-term capital costs, through measures such as cutting reserve requirement ratio, introducing MLF, guiding the downward trend of LPR, and lowering deposit interest rate. We expect that with the support of relevant policies, the economy will start to show signs of recovery from the beginning of the second quarter and rebound in the second half of the year.
(Li Feng is Associate Director of China Academy of Financial Research (CAFR), Co-Director of Shanghai Advanced Institute for Financial Research (SAIFR), and Professor of Accounting at Shanghai Advanced Institute of Finance (SAIF), Shanghai Jiao Tong University. Hu Hao is a researcher at China Academy of Financial Research, Shanghai Jiao Tong University)