Thursday, February 06, 2020 /11:21
AM / By Fitch Ratings / Header Image Credit: Capital FM
The ongoing coronavirus outbreak will dampen economic growth in China this year, but the scale of the impact remains uncertain and will depend on the duration and intensity of the health crisis, says Fitch Ratings. If the government were to launch a large-scale stimulus to offset the effects of the epidemic, it could have an adverse effect on other policy goals such as reducing financial risk. However, we believe that the government is only likely to do so if the economic impact of the virus proves to be substantially larger than the SARS outbreak in 2003.
Huge uncertainties remain over the impact of the coronavirus on China's economy. We believe it is still too early to make definitive adjustments to our GDP forecasts at this stage and instead have examined some illustrative scenarios. The SARS outbreak provides a useful benchmark, but there are significant differences between that epidemic and the latest one. Notably, the novel coronavirus (2019-nCoV) has spread faster than SARS, and official travel and workplace activity restrictions have been more aggressive. These factors suggest that the impact of the current outbreak on economic activity on a daily basis may be more intense than SARS, but the impact on GDP will also depend on the length of time taken to contain the virus.
SARS influenced economic behaviour significantly between early March and late May 2003 and is estimated to have reduced China's GDP growth by 1.5-2pp in 2Q03. The service sector was hardest hit, but industrial output growth also slowed.
Services account for a larger share of China's GDP today than they did in 2003 (54% compared with 42%). The much harsher official 'lock-down' restrictions in place would also imply that that, if the 2019-nCoV epidemic were to last three months, its economic impact would very likely be more severe than SARS. The tough official restrictions on economic activity could, however, result in a more rapid containment than SARS.
A shock to services and industrial output similar in scale to that from SARS would cut growth in 1Q20 to around 4% year-on-year, according to our calculations, compared with a forecast of 5.9% in our most recent update and 6% in 4Q19. Even allowing for some pick-up in growth in late 2020, this could see annual growth in 2020 fall to around 5.5%, compared with our latest annual forecast of 5.9%.
In a scenario where the virus peaks soon and starts to be contained within the next couple of weeks - causing panic to fade rapidly and official restrictions to be dismantled swiftly - there could be a smaller impact on growth, possibly knocking only 0.2pp off of 2020 annual growth.
Alternatively, if the epidemic is not contained until well into the second quarter, growth could fall more steeply. GDP growth in 1Q20 could be closer to 3%. This more adverse scenario would, however, be likely to prompt a more assertive policy-easing response that would boost growth in the second half, cushioning the impact of the shock to annual economic growth, possibly leaving annual growth above 5%.
If the government were to substantially ease credit policy to support the economy, this could impede or delay its efforts to reduce risks in the financial sector. However, we believe that this would only be likely if the outbreak were to extend into 2Q20. Fitch believes the authorities have more room to ease fiscal policy, but a substantial easing of credit policy could put downward pressure on China's sovereign rating, which we affirmed at 'A+/Stable' in December 2019.
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