On the eve of the Spring Festival this year, in order to prevent the novel coronavirus (COVID-19) epidemic in Wuhan from further spreading nationwide, the Chinese central government decided to impose strict travel restrictions throughout the country and extended the holiday, leading to some effective control over the disease. Now everyone is concerned about how this outbreak will affect this year’s economy. Will GDP growth rate fall below 5% this year? To which extent will the first-quarter economic growth be hit due to the spread of the epidemic as well as the prevention and control measures? Will there be zero or even negative growth? Given that the outbreak mainly occurred during the Spring Festival holiday, the impact on consumer demand was greater than that on investment demand. The Spring Festival Golden Week is usually a time when consumption is at its peak. According to data from the Ministry of Commerce, sales volume of the country’s retail and catering companies during the Spring Festival Golden Week last year exceeded 1 trillion yuan. Therefore, some research reports estimated that due to the epidemic, consumption was significantly hit during this year’s Spring Festival. The catering, hospitality, tourism, entertainment and transportation industries bore the brunt of the impact, with corporate revenue in these industries expected to fall off a cliff. In addition, losses in catering and entertainment during this period are difficult to make up for. Retail sales of consumer goods in the first quarter are likely to decrease by 50%-70%, which is equivalent to a loss of 500 billion to 700 billion yuan. Similarly, due to the epidemic and travel restrictions, population movements and outbound travel dropped significantly around the Spring Festival. According to data from the Ministry of Transport, during the 10 days of the Spring Festival holiday in 2020 (January 24 to February 2), the country’s railways, roads, waterways and civil aviation saw a total of 190 million passengers, a decrease of nearly 73% from the same Spring Festival period in 2019. As of February 6, the number of passengers across the country in the first 27 days of the Spring Festival travel rush (January 10 to February 6) decreased by 35% compared with the same period in 2019. According to the research report released recently by the Ren Zeping team at Evergrande Think Tank, based on the tourism revenue during the Spring Festival in 2019, the revenue loss in the tourism industry due to the epidemic is expected to exceed 500 billion yuan, which is equivalent to 2% of the GDP in the first quarter of 2019. They also estimated that due to the epidemic, the sluggish box office in the Spring Festival holiday may result in “zero growth” for the entire year, or even a negative growth. Indeed, based solely on the losses suffered by the retail, catering, cultural and entertainment, hospitality and tourism sectors in the service industry, the first-quarter revenue loss in the service industry seemed significant. The Ren Zeping team at Evergrande Think Tank said in its report that “during the 7-day Spring Festival holiday, box office might have dropped 7 billion yuan (market forecast), catering and retail sales might have slumped by 500 billion yuan (an estimated cut of 50%), and tourism revenue might have plunged by 500 billion yuan (completely frozen), thus leading to a total direct economic loss of 1 trillion yuan in these three sectors nationwide alone, equivalent to 4.6% of 21.8-trillion-yuan GDP in the first quarter of 2019.” So many people have commented online that GDP in the first quarter is likely to show negative growth. I also saw that some people were even more pessimistic, thinking that negative growth is inevitable, and the question is whether it will be -5% or -10%. Therefore, it is necessary to briefly discuss whether this possibility exists. My opinion is that though the spread of the epidemic and travel restrictions do have a big impact on the current economic activities, it is unlikely that there will be zero or negative growth in GDP in the first quarter. Why? Let’s start with what it means to have zero or negative GDP growth in the first quarter. Most ordinary people do not know that GDP is the sum of the value added in various industries, not the sum of operating revenue or total output value. Therefore, we should not count the total loss of operating revenue or output value caused by the epidemic into the GDP. As for how the value added is measured, it is a bit complicated. This is the job of the statistics bureau. As far as I know, the method of measuring value added is different by industry or sector. Take the tourism industry as an example. Its value added is measured in accordance with the “Accounting Method for Value Added of Tourism and Related Industries” formulated by the National Bureau of Statistics. The data required for accounting are derived from national economic accounting and surveys on the consumption structure in tourism and related industries, and it follows a two-tier classification method, involving 85 subcategories. So you can see that the accounting of value added is quite complicated, especially for the service industry. Of course, ordinary readers do not need to know how the value added of each industry is measured, but they need to know that what makes up GDP is the value added, which is much smaller than industry revenue or output value. Take tourism and catering industries as examples. Data from the National Bureau of Statistics that I can find showed that China’s total tourism industry revenue in 2018 was 5.97 trillion yuan, with the value added of 3.7 trillion yuan, and the ratio of value added was about 60%. The annual gross output value in the catering industry was 3.9 trillion yuan in 2017, and the value added was 1.45941 trillion yuan, with the ratio of value added being only about 35%. In fact, nationwide, the average ratio of value added against total output value in all industries would not exceed 30%, because the ratio in most manufacturing industries is less than 20%, although in some energy industries it may be as high as 70%. We assume that the value added in all industries across the country accounts for 30% of output value or operating revenue. Based on this, the GDP of 21.8 trillion yuan in the first quarter of 2019 means the total output value or revenue in all industries would be almost 65 trillion yuan. This is my first point. Secondly, according to the growth trend we have had in recent years, if China’s economy is not affected by external factors, its nominal growth rate will remain at least 8% per quarter on average (the nominal value at current prices, while actual GDP growth at constant prices is between 6-6.5%). In a word, if there were not the shock from the epidemic, first-quarter nominal GDP should have been at least 23.54 trillion yuan (21.8 trillion+1.75 trillion), meaning the operating revenue or output value should have been around 71 trillion yuan. If first-quarter GDP growth would become zero or negative due to the epidemic, the decline in the nominal growth rate of GDP must first offset the original growth trend, that is, the nominal growth rate must fall by more than 8 percentage points. In order to get that, the total revenue or output value in the first quarter should be cut by about 6 trillion yuan (from 71 trillion yuan to 65 trillion yuan). So, in the first quarter, is it possible for all industries to post a total loss of 6 trillion yuan in nominal revenue or output due to the epidemic? Evergrande Think Tank estimated that, during the 7-day Spring Festival holiday, box office might have dropped 7 billion yuan (market forecast), catering and retail sales might have slumped by 500 billion yuan (an estimated cut of 50%), and tourism revenue might have plunged by 500 billion yuan (completely frozen), thus leading to a total direct economic loss of 1 trillion yuan in these three sectors nationwide alone. And this is only for the service industry; manufacturing has not been taken into account. Is it impossible to post a loss of 6 trillion yuan in operating revenue and output value in the first quarter? I don’t think it is possible given the current situation of outbreak control and economic recovery. Some of the studies we've seen so far may have exaggerated the revenue loss estimates for the service sector. While the overall impact of the epidemic on the sector cannot be accurately measured, figures given by many research institutions, including the Evergrande Think Tank, are highly problematic in statistical dimensions.  In the case of tourism, each industry calculates its income based on all the industries it covers. For example, the income of tourism covers catering, shopping, hospitality, entertainment, sightseeing and transportation. Generally speaking, sightseeing, transportation and the hospitality sector represented by hotels and accommodations are the three pillars of tourism. In 2018, total revenue of China’s tourism industry reached 5.97 trillion yuan, representing an added value of 3.7 trillion yuan. This figure has already included partial incomes generated from sectors like catering, shopping, hotels and accommodation, entertainment, sightseeing and transportation. In a similar vein, the 4-trillion-yuan-plus revenue generated by the catering industry has also partly included income from the tourism sector. So we cannot simply add up the revenue or the losses of revenue from, say, catering, retail or tourism because there are too many repeated calculations. The same applies to calculating incomes and losses for other sectors in the service industry. Therefore, while the National Bureau of Statistics has yet to provide a final summary of revenue losses across industries, the calculation that yielded the purported 1 trillion yuan worth of economic losses from movie box office, catering and retail, as well as tourism during the Spring Festival Golden Week Holiday was based on duplicate figures. In other words, the epidemic is bound to bring sizable losses to the service sector in the short term. But simply adding up losses from all segments would overstate the overall impact on the service industry. As I said earlier, were the GDP to record zero growth in the first quarter, the blow dealt by the epidemic should be huge enough to offset the previously projected growth rate and momentum. In nominal terms, such growth rate hovers around 8%. Before veering off this growth trajectory, the economy is unlikely to post negative growth even if revenue or economic output plunges to a great extent. There is no doubt that this coronavirus outbreak will exert a bigger impact on the economy than SARS did in 2003. Most economists and research institutions have made similar judgments. Apart from the huge short-term shocks to the service sector, the manufacturing sector and the industrial chain are also likely to be affected to some extent. But as long as the epidemic gets contained quickly, such influences won’t be major. It’s probably safe to say the economy would suffer the most from the epidemic between the Spring Festival and the end of February. Such impacts would begin to be gradually ameliorated as businesses resume operations since mid-February. As far as manufacturing is concerned, many enterprises cannot resume operations on time due to the epidemic (According to estimates from Hua Chuang Securities on February 12, only 29.7% of migrant workers had returned to their posts. In addition, some returnees are subject to centralized or home quarantine in hard-stricken areas. These have given rise to a severe labor shortage that bars enterprises from normalizing business operations, and some production orders are cancelled, corporate revenue and investment will be certainly impacted. However, as PwC points out in a report, the epidemic is taking relatively less of a toll on investment than consumption. Take the automotive industry as an example. In 2019, the sector saw declines in both sales and production, with dealers and manufacturers holding a large amount of inventory. As a result, even in light of temporary delays in the resumption of production, the actual impacts on enterprises remain relatively limited. (Thanks to the Spring Festival holiday, the first quarter normally witnesses the lowest operation rate of the year among manufacturing corporations.) Though the prolonged holiday could delay the full business resumption of medium, small and even micro enterprises by one to two weeks, a vast majority of regions are expected to see an all-rounded business restoration by the end of February, thanks to a suite of government incentives in place. Therefore, the loss of output in the manufacturing industry will be relatively limited in the first quarter. Based on the above analysis, my estimates on the epidemic’s economic impacts are reflected in an article published on February 1 titled “Duration of the Epidemic: The Most Important Factor Affecting Full-Year Economic Growth,” as well as an upcoming article on Project Syndicate titled “Coronavirus Will Not Cripple China’s Economy.” Considering that the epidemic dashes a wide range of industries but isn’t likely to last for long, GDP growth in the first quarter will most likely fall by 30% to 50% in the most widely estimated scenario. This would indicate a drop by 2-3 percentage points, if previous growth forecast is set at 6% in nominal terms. Taking a 50% decline in GDP growth as the upper limit: GDP is forecast to be trimmed by nearly 1 trillion yuan in the first quarter, equivalent to roughly 3 trillion yuan in business revenue or output value. If 70% of revenue comes from the service sector, that represents approximately 2 trillion yuan’s loss. This is the upper limit of my estimates. If we do simple calculations based on this logic, assuming that the epidemic gets controlled in the first quarter and the economy in the second quarter bounces back, the drag on full-year growth rate is between 0.5-0.75 percentage points. In fact, this has already slightly outstripped recent estimates by Evergrande Think Tank and Oxford Economics. In a recent report, chief economist Tommy Wu and Louis Kuijs, head of Asia Economics of the Oxford Economics, have made comprehensive assessments on NCP’s disruption for China’s economy, lowering Q1 growth rate by more than 2 percentage points. Considering economic rebound is likely in the second quarter, they expect GDP growth of 5.4% for 2020 as a whole (from the previous estimate of 6%). Taking into consideration three possible scenarios, the Evergrande study led by Ren Zeping has provided estimates on real GDP growth rate for the four quarters. Their estimates on full-year growth rate lie between 5% and 5.4%.   Of course, when evaluating the economic impact of an epidemic, it’s also important to take into account the duration of the epidemic apart from the original growth trajectory. As long as we manage to control the epidemic within the first quarter, such impacts will be watered down amid full-year growth featuring recovery, as the economy bounces back and recovers from the second quarter and beyond. In a February 12 interview, IMF President Kristalina Georgieva also mentioned that the organization is collecting data for a comprehensive assessment of the epidemic’s impacts on the global economy. In terms of economic prospects, the Chinese economy is set to recover quickly as factories resume operations and inventory gets replenished. The most likely scenario is the occurrence of a “V-shaped” recovery, indicating a stark decline followed by a sharp rise back to its previous peak. The overall impact of the epidemic on China’s economy is relatively manageable. Let’s wait and see.