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ANALYSIS - Coronavirus: New 'Black Swan' of global economy?13 February 2020

Problems caused by virus to global supply chain expected to negatively affect various countries

Nurullah Gur   

Nassim Nicholas Taleb, a former options market broker who is intensely interested in the science of statistics, was the first to suggest the term “Black Swan,” which is used to emphasize unpredictable, rare events that have the potential to deeply affect the financial world and global economic systems.

With the impact of trade wars, Brexit and various geopolitical issues, the global economy has been going through a hard time and the possibilities of recession and economic slowdown are on the global agenda. One of the concerns is the fear of a “Black Swan” scenario coming true, further deteriorating the global economy, which has already been on fragile ground for some time. The recent outbreak of the novel coronavirus that emerged in Wuhan, China brought forward the possibility of such a scenario, increasing concerns about the global economy.

Impacts of such outbreaks are hastily interpreted primarily through their impact on exchanges. I believe this to be a faulty choice. Financial markets strongly react to the flow of information about these kinds of unexpected events. An increase in the death toll might suddenly result in a 10% loss of value in stock markets. On the other hand, even a shred of good news could be regarded as an opportunity to buy. Because we are talking about China, which is considered the “factory of the world,” it would be wise to assess the impacts through supply chains, foreign trade and real sector channels.

In order to fully comprehend the probable impacts, one of the most recent cases to look at would be the 2003 SARS outbreak. Due to the impact of SARS, the Chinese economy is estimated to have lost at least 2 percentage points in real GDP growth in the second quarter of 2003.

Despite this, thanks to economic stimulus packages by the Chinese government, an increase in export performance and delayed demand being activated in markets later in the year, the Chinese economy succeeded in closing 2003 with a 10% growth rate. It is estimated that global economic growth lost 0.1 percentage point of real GDP due to SARS.

The impacts of the new coronavirus, also called the “Wuhan virus,” could be felt more deeply than that of SARS. The Chinese economy compensated for shrinking domestic demand in the second quarter of 2003 by exporting more goods and services. Consequently, export rates of China increased by 35% in 2003. The fact that China became a member of the World Trade Organization in 2001 also had a great role to play in this impressive export performance.

However, China no longer has the same radius of action that would enable it to increase its exports in such significant numbers. In recent years, China has gone through a transformation from an export-based growth model to a model dependent on domestic demand. The share of domestic demand in the growth composition is much heavier now than it was in the past.

Accordingly, the virus would slow down domestic demand that would have a more distinct impact on economic growth. Within the economic sphere, epidemics and natural disasters tend to impact the service industries the most. The importance of the service industry in the Chinese economy has increased from 40% to at least 50% in the past 20 years. This shift in the sectoral structure of the economy might result in the impact of the coronavirus on growth to be stronger compared to 2003.

In comparison with 2003, China’s foreign trade is five times bigger today, the number of tourists sent abroad is six times more and its share from the global economy has also increased fourfold. It would not be a surprise if developments in China impact the global economy more deeply than it would 17 years ago.

The case of SARS happened at a time when risks in the global economy were lower, the desire for investments were higher and trading volume was in a tendency to further increase. But now, along with uncertainties and higher risks, we are going through an era in which global growth and trading volumes hardly move forward due to trade wars. The deterioration of expectations on the global economy might render the impacts of the virus a tad stronger.

How much will these factors increase the negative impact of the Wuhan virus on the economy compared to that of SARS? With reference to the scenario in which the coronavirus outbreak would be under control by April, Shang-Jin Wei from Columbia University made a very optimistic prediction that the impact of the virus on Chinese economic growth would be limited to only 0.1 percentage point. International finance organizations predict that the Chinese economy will experience a loss of growth by 0.5 percentage point on average. There are also grave pessimists who predict that the Chinese economy will face a loss of growth of more than 1 percentage point. Predictions about the overall global economic growth loss due to the virus range between 0.02 to 0.03 percentage point.

Along with the uncertainties about the spread risks of the virus, the possible impacts of the Beijing government’s policy measures in order to rejuvenate economic activity are hard to foresee as of now. For that reason, it is difficult to make predictions about the situation for the entire year. It is useful to be cautious about the yearly growth predictions in such uncertain times.


Which countries will be affected, and how much?

Based on the present data, it would be wiser to predict the situation in reference to the first quarter rather than the entire year. According to predictions by Bloomberg Economics, the global economy might face a loss of 0.416 percentage point in the first quarter of 2020. Deeply conjoint to China in terms of finance, logistics and merchandise, Hong Kong is one of the most likely countries to be affected by the virus.

Slowing down of China means less product exports, which would affect the main product exporters such as Brazil and Australia. Mostly dependent on China in its intermediate goods, South Korea’s economic growth in the first quarter of the year might end up 0.4 percentage point, less than expected due to the virus.

Owing to the deficiencies in intermediate good supplies coming from China, a South Korean automobile company decided to halt its operations for some time. Problems to be caused by the virus and a breakdown in expectations in the global supply chain are expected to negatively impact the U.S. and various EU countries. Among the EU countries, the virus is expected to affect German economy the most.


Possible impacts on Turkish economy

Since the dependency of Turkish economy on China is less compared to other G20 countries, the impact of Wuhan virus on Turkey might be relatively less. The loss of acceleration in global economic growth and trading volumes might also slow down the growth of export rates in Turkey. On the other hand, Turkey’s foreign trade deficit to China might become tighter. A decrease in global growth expectations also brings down the petroleum prices. The petroleum prices dropping below 55 dollars is a positive development in terms of inflation and account balances.

Besides, Chinese tourist numbers to Turkey, which has significantly increased in the recent years, might also face a slow-down. This scenario will have a negative impact on the account balances. A certain portion of the global liquidity coming from the developing Asian markets might be shifted to Turkey as an alternative market.

Being limited, this kind of cash inflow would still have positive consequences in the markets. If the expectations about the impact of the virus on the global economy further deteriorate, significant central banks such as FED and ECB could go for an additional monetary expansion. Such a policy move, although limited, would give Turkey more room to play in terms of interest and currency markets. The final and concrete outcomes of the current possible (positive and negative) impacts will be dependent on which actors are stronger and more influential in the process.


The riskiest scenarios

There are three risky scenarios that might increase the impact of the virus on the global economy. The first significant risk is the possibility to not be able to get the virus under total control by the end of the second quarter of the year. As the weather temperatures increase, the possibility of the virus losing its durability might result in this scenario to not happen.

The growing social tension in China due to the virus and the Beijing government overreacting to this situation is another risky scenario. Although some criticize this, it is obvious that China is acting in a more transparent manner compared to its reaction to SARS outbreak in 2003. In such a serious situation, it is not easy to keep all related issues under control -- first and most important of which are quarantine processes.

In this regard, the Beijing government has done relatively a good job until now. If a similar situation were to happen in a Western country, it would not be that easy to keep the situation under control as such. Therefore, the possibility of social tension growing and things getting out of control of the Beijing government is low at present.

The third risky scenario may emerge if Beijing misses the import product total that it guaranteed to buy from the U.S. within the framework of the first phase agreement, which would result in a blunt reaction from U.S. President Donald Trump (such as the threat of raising the tariffs again).

In his statement on the issue last week, Trump emphasized that he would comply by the requirements of the deal and that he has full faith in China overcoming the virus crisis.

We have witnessed Trump suddenly changing his mind on lots of issues countless times. It would not be wise to trust him in this issue entirely. No one can guarantee that he will not outmaneuver China and use this situation in his benefit for the 2020 election campaign.

Financial markets are “not pricing” these risky scenarios that are unlikely to happen but are very frightening. As we have mentioned above, it is wise to be cautious in respect to growth predictions due to the aforementioned uncertainties. However, the predictions based on the limited data at present (if we look back, we will recall that in the aftermath of 1989 Tiananmen Square Events Chinese economy only grew at the rate of 3.8) suggest that in the year 2020, there is a high chance of China experiencing the lowest growth rates after 1990, along with falling behind in global growth, dropping under 3%.


* [Nurullah Gur is a professor at Istanbul Medipol University’s Economics and Finance Department, focusing on economic growth, finance – real sector relations and international political economy]

* Translated by Firdevs Bulut


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