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Charting the Impact of the Coronavirus

Bloomberg Economics
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Bloomberg Economics

The coronavirus threatens a blow to Chinese and global growth. With the situation on the ground
changing fast, both rapid containment and escalating contagion are possible. Precise forecasts are
not. Even so, the experience of the SARS outbreak in 2003, changes in the Chinese economy since
then, and the interlinkages between China and the world provide a basis for thinking through the
central scenarios. This report brings together highlights of Bloomberg Economics’ ongoing analysis of
the emerging risk to Chinese and global growth. For Bloomberg Economics latest view on the virus,
and other issues impacting the global economy, visit BECO<GO> on the Bloomberg Terminal.

Published Feb. 12, 2020

All research appeared first on the Bloomberg terminal

Contents
4 Virus May Drag China GDP to 4.5% — First Published Jan. 31
8 How Coronavirus Can Infect Global Supply Chain —First Published Feb. 10
12 Virus Epicenter-Hubei Province in Charts — First Published Feb. 10
14 Tracking the Virus—Timeline of Cases, Measures — First Published Feb. 6 *
16 China Crisis Fighting Focus to Shift Toward Growth — First Published Feb. 4 *
17 Coronavirus Infection Costing Oil $8 a Barrel — First Published Feb. 4 *
18 U.S. Recovery Can Fight the Virus Without Fed Medicine — First Published Jan. 31 *
19 What Coronavirus Shock Means for ECB, BOE — First Published Feb. 4 *
20 Virus Clobbering Japan, Hong Kong, Asean — First Published Feb. 3 *
21 Tackling the Virus Impact in Stages: Policy Map — First Published Feb. 11
23 Contacts

* This is a summary of a research article which is available in full to subscribers

on the Bloomberg terminal.

Questions or feedback? Contact editor Tim Farrand at tfarrand@bloomberg.net

3
Bloomberg Economics

Virus May Drag China GDP to

4.5% With Ripple Effect
By Chang Shu, Jamie Rush and Tom Orlik

We explore scenarios for the suffer a bigger blow. China’s measures to block the spread of
potential impact of the 2020 GDP growth could slow the disease:
coronavirus on Chinese and to 5.6%.
global growth, drawing on the  Travel restrictions have been
experience of the 2003 SARS This kind of empirical exercise imposed on Wuhan -- the
outbreak, changes in China’s provides a useful way to think capital of Hubei province and
economy since then, and a large- through the potential economic epicenter of the outbreak --
scale model of the global impact of the virus. The risk is and widened to almost the
economy: that it gives a false impression of entire Hubei province -- a
certainty, when the situation on population of 59 million.
 In a containment scenario, the ground in China is evolving  The central government has
with a severe but short-lived fast. Rapid containment and launched an aggressive
impact, the virus could take escalating contagion are both campaign to raise public
China’s first-quarter GDP possibilities, and would result in awareness, advising people to
growth down to 4.5% year on widely different growth impacts. avoid traveling and
year, a drop from 6% in the gatherings. Restaurants,
final period of 2019 and the Extreme Measures hotels, and tourist sites --
lowest since the quarterly data With the number of confirmed normally crowded for New
begins in 1992. cases rising above 40,000, and Year celebrations -- have seen
 A recovery in the second the death toll hitting 908, China’s business slump.
quarter and stabilization in the government is taking extreme
second half would leave 2020
GDP growth at 5.7%, down
from 6.1% in 2019 and -0.2 ppt
below our forecast before the Virus Impact on China
outbreak.
 Looking outside mainland
China, Hong Kong faces the
biggest blow, with 1.7 ppts
shaved off first-quarter GDP
growth. Asian neighbors Korea
and Japan would also take a hit.
Further away and with weaker
trade ties to China, the U.S and
euro area would face drags
around 0.1 ppt.
 In a prolonged outbreak
scenario, with containment of
the virus delayed into the
second quarter, the Chinese
and global economies would Source: Bloomberg Economics

4
Bloomberg Economics

There’s already evidence of the virus impact

spilling over from consumption to production.
The New Year holiday has been extended.
Factories have suspended activity.

 The Lunar New Year break has
been extended to Feb. 2 from
Jan. 30, a reduction of three
working days. Shanghai,
Guangdong, and Zhejiang --
China’s main economic
engines -- have said
businesses can stay closed
until Feb 10. Some companies
have halted production or told
workers to work from home.
These measures -- critical for
limiting the spread of the virus --
mean a heavier toll on the
economy in the short term, with
the impact broadening from
consumption to a blow to
production and supply chains.
The starting point for our
assessment of the potential
economic impact is what
happened during the SARS
outbreak in 2003. Back then,
consumption growth fell 4.6
ppts, or 1.5 times the standard
deviation for the five-year
period.
consumption growth 0.6 ppt
above the baseline. Those
assumptions are motivated by
several considerations:
 The outbreak is occurring
during the New Year holiday --
peak time for consumption.
Spending that would have
taken place during the
festivities won’t be recouped
afterward.
 The current travel restrictions
are much wider than those
imposed during the SARS
period. There were no
measures locking down cities
in 2003, and no extension of a
national holiday.
 The volatility of China’s growth
is significantly smaller now
Containment Scenario
than it was in 2003 -- a fact
that cynics will attribute to
statistical smoothing, but is
also a reflection of a maturing
economy.
 Putting those pieces together,
we end up with a smaller
percentage-point drop in
consumption growth than
during the SARS episode, but a
larger standard deviation move.
 Thinking about the recovery,
we note that a large part of
the blow to consumption is
expected to come from
reduced spending on services.
As such, much of it will be lost
rather than delayed. After the
outbreak, we expect
consumption to return to
trend, not bounce significantly
above it.

For the coronavirus, we assume

consumption growth will slow
2.8 ppt from our baseline
forecast, a drop three times the
standard deviation in the past
five years. This drop would be
more than half of China’s
consumption growth at 5.5% in
the fourth quarter of 2019. For
the second quarter, we assume
a modest recovery, with Source: Bloomberg Economics

5
Bloomberg Economics

During the SARS episode, GDP dropped a

full 2 ppts, falling from 11.1% in the first
quarter of 2003 to 9.1% in the second.

Investment maintained blistering
growth during the SARS episode.
This time around, we assume an
impact, with capital spending
dropping 2.4 ppt below our
baseline forecast in the first
quarter of 2020, before rising
0.9 ppt and 0.4 ppt above in the
following two quarters as
delayed projects get started.
That is motivated by a number of
assumptions:
 There’s already evidence of
the virus impact spilling over
from consumption to
production. The New Year
holiday has been extended.
Factories have suspended
activity.
 Cold weather at the start of
the year typically means a stop
to construction activity,
especially in the frozen north.
With the virus striking just as
the thaw begins, the timing of
resumption may be delayed.
 Falling equity markets -- with
the mainland market down
3.1% on the day before the
New Year holiday -- evidence
a blow to China’s animal
spirits.
impact on China’s growth. Our
analysis suggests it could fall to
4.5% year on year in the first
quarter, down from 6% in the
fourth quarter of 2019, and 1.4
ppts below our forecast before
the outbreak.
During the SARS episode, GDP
dropped a full 2 ppts, falling
from 11.1% in the first quarter of
2003 to 9.1% in the second. The
main reason for anticipating a
smaller drop in percentage-point
terms during the coronavirus
outbreak is that the volatility of
China’s growth is markedly less
than it was 17 years ago. Back
then, big fluctuations in GDP
were not unusual. They are now.
Global Impact
A sharp drop in the first quarter,
followed by a recovery in the
second and stabilization in the
latter half, would leave China’s
growth for the year at 5.7%,
down from 6.1% in 2019 and 0.2
ppt below our baseline forecast
ahead of the outbreak.
Prolonged Outbreak
What happens if the virus is not
contained? We also ran a
scenario where the outbreak is
prolonged into the first part of
the second quarter before
gradually coming under control.
If that’s how it plays out, we’d
anticipate China’s GDP growth
also slowing in the second
quarter to 5.4% before
recovering to 6.3% in the third.

Put the consumption and

investment pieces together and a
plausible scenario for the
coronavirus would see a
pronounced, but short-term Source: Bloomberg Economics

6
Bloomberg Economics
Growth for the year as a whole
would come in at 5.6%.
Global Spillovers
Back in 2003, China accounted
for just 4% of global GDP. Fast
forward to 2020, and its share
has increased to 17%. That means
the global spillover if China’s
growth slumps will be larger. We
used NiGEM -- a large scale
model of the global economy --
to estimate where the impacts
would be felt most:
 China’s Asian neighbors are
deeply embedded in regional
supply chains, export to
China’s consumers, and
benefit from China’s tourist
visitors. Hong Kong stands out
as the most exposed -- our
simulation shows a hit of 1.7
ppts in the first quarter. South
Korea and Vietnam would also
suffer, each slowing by 0.4
ppt. Japan would take a 0.2
ppt hit.
 Commodity exporters -- hard
commodities for China’s
industry and soft commodities
for consumers -- also face a
hit. Australia and Brazil could
both see 0.3 ppt trimmed
from near-term growth as
demand drops, while South
Africa would see a more
modest hit.
 With smaller export exposure,
With smaller export exposure, big Western
economies would face a smaller hit.
Germany is the exception
big Western economies would imports as a function of
face a smaller hit. Germany is domestic demand without
the exception, with a growth distinguishing between
hit of 0.2 ppt, which would different components of
unwind in the second half. The demand. As a consequence, it
U.S. and U.K. might see a 0.1 might overstate the impact of
ppt drag. a virus that registers its
 Assuming the outbreak is biggest effect on the services
contained, most economies sector. Services are mainly
would see a recovery in the supplied domestically, with
second quarter, followed by limited impact on imports.
stabilization in the second  Finally, we assume that the
half. Outside China and a few outbreak is contained to China
close neighbors, the impact -- and so affects other
would be difficult to see in the economies through the
full-year growth data. slowdown in China’s growth,
not because they suffer their
A few caveats to the global own outbreaks.
analysis -- pointing in both
directions:
 First, NiGEM captures the
impact of a China slowdown
through trade. It does not
capture the impact of a China
slump on global sentiment. In
that respect, it might
underestimate the spillovers.
 Second, the longer factory
output is affected the bigger
the risk China’s dominant
position in global supply
chains disrupts activity
elsewhere. We have not
captured the impact via
intermediate consumption of
Chinese exports in other
countries.
 Third, NiGEM models China’s
7
Bloomberg Economics
How Coronavirus Can Infect the
Global Supply Chain
By Maeva Cousin
China is the world’s largest exporter
of intermediate manufactured
products -- components destined for
use in supply chains across the world.
The longer the coronavirus curtails
China’s factory output, the bigger the
risk of disruption elsewhere. Using
detailed OECD trade data, we assess
which economies are most
vulnerable:
 About 20% of global imports
of intermediate manufactured
goods come from Chinese
No data
8
factories. Global reliance on on supplies from China. About
these inputs for production 30% of all imported U.S.
has doubled since 2005 as manufacturing inputs came from
China expanded and supply China in 2015, and the trade war
chains went global. appears to have only had a small
 For countries in the Asian effect in weaning manufacturers
supply chain, the exposure is off Chinese products.
bigger -- about 40% of all
imports of intermediate
manufactured products
consumed in Cambodia,
Vietnam, South Korea and
Japan came from China in 2015.
 American factories are also reliant
Bloomberg Economics

The longer the impact of the virus, the

greater the risk of disruption to the global
industrial sector.

Asian Factories Risk Supply Disruptions

 Finding alternative supplies

will be particularly hard for
products in which China is a
dominant supplier globally.
More than a third of imports of
textiles, computer and
electronics, electrical
equipment and non-metallic
mineral products used in the
production process globally
came from China in 2015.
Chinese dominance has
increased sharply across all
sectors since 2005.
 Uncertainty about the severity Source: OECD TiVA, Bloomberg Economics
and duration of the virus
outbreak, and hence its impact
on China’s factory sector, China’s Factories Dominate Intermediate Goods Globally
remains elevated. Stocks of
intermediate products will help
factories across the world
continue producing in the near
term. And some will be able to
find alternative sources of
supply at home and abroad. But
the longer the impact of the
virus, the greater the risk of
disruption to the global
industrial sector.

Source: OECD TiVA, Bloomberg Economics

9
Bloomberg Economics

Virus Epicenter — Hubei

Province in Charts
By Qian Wan

A month ago, economic
conditions in China’s Hubei
province were of interest mainly
to its 59 million residents. Now,
the epicenter of the coronavirus -
- under lockdown by the Chinese
government -- is the focus of
intense global attention.
Bloomberg Economics sets out
how Hubei fits into China’s
national economy, and intersects
with global supply chains. The
main takeaways:
 Hubei is not a major exporter.
$34 billion in overseas sales in
2018 accounted for just 1.4% of
China’s total. That limits the
global spillovers.
 In certain industries,
though, Hubei punches above
its weight. Autos, health care,
aerospace and defense, and
construction materials are all
sectors where Hubei factories
loom large, raising the risk of
disruption to supply chains.
 Hubei’s debt levels appear
relatively low. That, combined
with targeted liquidity support
from the central bank, reduces
concerns about risks to
financial stability.
in Hubei’s capital, Wuhan, on
Dec. 31. More than 40,000
people have since been infected,
mostly in Hubei, with
908 deaths in China and two
elsewhere, as of Feb. 9.
The province, located in central
China, is tightly linked with other
regions. It ranks seventh by
passenger traffic among China’s
31 provinces, with 983.5 million
travellers in 2018. Wuhan is a
major junction for railways
crisscrossing the nation.
Between the first official report of
the disease on Dec. 31, and the
travel ban on Jan. 23, there were
Confirmed Cases in Mainland China by Province
over three weeks -- a period in
which millions would have
moved in and out of the city.
Hubei’s GDP came in at 3.9
trillion yuan in 2018, making the
provincial economy roughly the
same size as Poland.
 Hubei ranks seventh among
the 31 provinces -- accounting
for 4.3% of national GDP.
 Wuhan’s GDP was 1.5 trillion
yuan in 2018, about 1.7% of
China’s total.
 Hubei’s 59 million population
is comparable to that of Italy,
and accounts for 4.2% of
China’s total.

The 2019 nCoV virus was first

reported by the government Source: Bloomberg New s

10
Bloomberg Economics

Hubei’s 59 million population is comparable

to that of Italy, and accounts for 4.2% of
China’s total.

Hubei is a major industrial Hubei’s GDP—Seventh Largest Among China’s Provinces

center:

 The province is big in auto

production, accounting for
about 8.7% of China’s total
output in 2018. The outbreak
has already pushed South
Korean auto
firms Hyundai and Kia to halt
production -- citing the impact
on supply chains.
 Hubei is also a major player in
other industrial sectors,
accounting for 11% of national
output of flat glass, 10% of
fertilizer, 4.9% of cement and Source: National Bureau of Statistics, Bloomberg Economics
3.3% of crude steel.
 Wuhan ranks sixth among
Chinese cities in terms of Hubei’s Listed Firm Revenue as % of Total National Revenue
manufacturing output, as of
2018.

Data on listed companies

provide an alternative way of
understanding Hubei’s
economy. Hubei-based firms
have large market shares in a
range of industries in China.

 Hubei firms account for about

18% of total revenue in health
care facilities and services,
about 13.5% in aerospace and
defense, and 9% in Source: Bloomberg Economics

11
Bloomberg Economics

One small saving grace from an international

perspective -- Hubei’s industries largely serve
the domestic market.

construction materials, as of
end-2019.
 In waste and environment
equipment, consumer staples,
and semiconductors, Hubei
firms account for more than
5% of total revenue.
 We used Bloomberg’s equity-
screen function to track revenue
for Hubei’s listed firms.
One small saving grace from an
international perspective --
Hubei’s industries largely serve
the domestic market. A relatively
small role in China’s exports
means less -- though certainly
not no -- supply-chain risks for
trading partners.
 Hubei shipments bound for
external markets totaled $34
billion in 2018, ranking 14th
among the 31 provinces.
 Hubei’s exports account for
1.4% of China’s total exports.
Even so, that doesn’t mean
foreign companies won’t incur
collateral damage. A portion
of Hubei’s sales to other
provinces will make their way
into global supply chains.
Bloomberg Intelligence has
taken a comprehensive look at
industry-level risks from the
outbreak.
In terms of the threat to broader
financial stability for
China, Hubei’s relatively low

12
Bloomberg Economics

In terms of the threat to broader financial

stability for China, Hubei’s relatively low debt
burden suggests limited risks.

debt burden suggests limited Hubei Not a Major Export Hub

risks.

 Hubei’s government debt-to-

GDP ratio was about 23% as of
September 2019, the 10th
lowest among the 31
provinces.
 This is much lower than
Qinghai’s 64%, and below the
31% average across the
provinces.
 China’s central bank and
financial regulators have
already moved to
provide liquidity support, and
introduce targeted measures Source: National Bureau of Statistics, Bloomberg Economics
for Hubei, further reducing the
chances of a blow to financial
stability. Local Government Debt to GDP
 Ahead of the outbreak,
Bloomberg Economics
ranked Hubei as one of
the least risky provinces in
terms of financial stability.
That’s a reflection of Hubei’s
relatively low government
debt, strong economic growth
and fiscal strength.

Source: Bloomberg Economics

13
Bloomberg Economics
Tracking the Virus—Timeline
of Cases, Measures
By Justin Jimenez and Tom Orlik
Coronavirus cases and deaths
continue to rise. China's
response -- necessary to
prevent the spread of the virus
-- is having a marked impact on
the economy. To track the
spread of the outbreak,
measures to contain it, and
early signs of economic impact
we have put together an
annotated chart.
The number of cases continues
to increase at a torrid pace.
There were 42,638 confirmed
global cases as of Feb. 11, up
from almost 12,000 a few weeks
Coronavirus Timeline
Source: Bloomberg Economics
14
ago. That compares with nearly
8,100 for SARS in 2002-03. The
death toll has now exceeded that
of SARS. The policy response has
been rapid and far reaching.
Hubei, a province of more than
59 million people, has been
quarantined.
Major centers of business and
industry are shuttered. Russia,
Mongolia and North Korea have
closed their land borders with
China. Several nations have
barred entry to foreign nationals
who have traveled to the
mainland.
The early signs of economic
impact are clear. Factories are
idle. Shopping malls are
deserted. South Korean auto-
maker Hyundai has suspended
production, citing disruptions to
the supply chain from the virus.
Even as financial markets
stabilize after a sharp slide
following the Chinese New Year
break, the combination of rising
cases and extreme prevention
measures seems set to guarantee
a significant drop in 1Q GDP
growth. Our scenario
analysis flags the risk of a
slowdown to 4.5%.
Bloomberg Economics
Tracking the Impact
What impact will the coronavirus
have on China's economy?
China's 1Q data calendar is
sparsely populated so it won't be
until mid-March that investors
get hard numbers on the first two
months of the year. To fill the
gap, and track the reaction in
China's financial markets,
Bloomberg Economics has
collected data on coronavirus
cases and asset prices to
construct a dashboard.
The dashboard shows a
pronounced sell-off across
Chinese stocks, FX, and
commodities when markets
Coronavirus Market Impact Dashboard
Source: Bloomberg Economics
More positively, there’s no sign yet of any
concern about financial stability
reopened on Feb. 3 after the
extended Lunar New Year break.
In the days that followed, with
bad news from the break priced
in and the expectation of
additional monetary support,
markets steadied.
Still, the sharp declines evidence
elevated concern that the virus
will deal an economy-wide blow
to growth and earnings.
Our scenario analysis points to
the risk of 1Q GDP growth
slumping to 4.5% -- a record low.
More positively, there’s no sign
yet of any concern about
financial stability. We look at two
measures -- corporate credit
spreads, and the premium non-
bank financial institutions pay for
funding. In episodes of financial
stress, both would be expected
to rise. So far, they have been
relatively stable to lower.
Color coding for the dashboard
reflects the distance of the
reading from the average
between Jan. 20 and Feb. 4, with
the upper and lower thresholds
being two standard deviations
from the mean. Green indicates
strength/less severity, while red
shows weakness/greater severity.
15
Bloomberg Economics

China Crisis-Fighting Focus to

Shift to Growth Support
By David Qu

China's authorities are blasting
liquidity into the economy and
rolling out emergency relief
measures to damp the
coronavirus shock. Next up -- a
boost in cyclical support to
cushion the slowdown.
Stimulating activity right now
would promote transmission of
the virus. Once it's contained,
though, we expect the policy
emphasis to shift to boosting
demand and growth. Fiscal
policy is likely to take the lead,
aided by monetary easing.
The fiscal deficit target may be
increased to 3% of GDP this year
-- the upper limit that was held
even during the Great Financial
Crisis period -- from 2.8% in
2019. An incremental increase in
the budget deficit would give the
government more room to boost
subsidies for household
purchases of durable goods.
enterprises’ burden for social
security. For example, Suzhou, a
city in Jiangsu Province, has
indicated it will allow companies
to postpone submissions of
social security funds for
employees.
An increase in the issuance quota
for local government special
bonds. In 2019, the People’s
Congress approved a 2.15 trillion
yuan net increase in local
government special bond
issuance. Before the outbreak of
the coronavirus, it was widely
expected the quota for 2020
would be as high as 3 trillion
yuan. We now think it could be
raised even higher -- depending
on the severity of the impact on
the economy from the virus.
The People’s Bank of China is
already flooding the banking
system with liquidity at lower
rates in its money market
operations. In our view, it’s likely
to broaden the scope of the
monetary stimulus this year --
though we don’t expect it to
open the floodgates, given the
risks from a buildup of debt.
The PBOC will probably reduce
the required reserve ratio by
another 150-200 basis points by
the end of the year.
The PBOC is likely to reduce the
interest rate on its one-year
medium-term lending facility, the
base for the Loan Prime Rate, to
help lower funding costs.
The one-year LPR -- the reference
rate for bank loans to companies
-- will probably be lowered by 40
bps this year.

Reform of the consumption tax

may also be accelerated. This
could entail lowering tax rates on General Budget Deficit, Special Bond Quota
consumer discretionary goods,
particularly those impacted by
the virus.

Tax support for affected

industries. This would probably
be tilted toward catering, hotels,
and local transportation and
entertainment businesses -- in
other words, companies most
exposed to a dive in spending on
consumption and services.

Waiving or temporarily reducing Source: Ministry of Finance, Bloomberg Economics

16
Bloomberg Economics
Coronavirus Infection Costing
Oil $8 a Barrel
By Ziad Daoud
Brent crude is down $10 per
barrel so far this year. We
estimate about $8 of the drop is
due to weak demand, which for
the most part is related to
concerns about the impact of the
coronavirus on activity in China.
The remaining $2 decline is due
to ample supply.
Oil rallied at the beginning of the
year as markets worried about
supply disruptions from major
exporters in the Middle East.
Now prices are falling on
concerns for a demand shortfall
from China, the world’s largest
importer, as the coronavirus
continues to spread across the
country.
No one thought the two key
words for oil markets in the first
six weeks of 2020 would be
‘Soleimani’ and ‘coronavirus’. We
estimate the U.S. killing of the
Iran general led to a $3 increase
in oil prices at the beginning of
the year, but this was completely
wiped out a week later as both
countries de-escalated tensions.
Today, the spread of the
cornonavirus in China is driving
down oil prices. Chinese oil
demand has reportedly
dropped by a fifth. Our scenario
analysis points to the risk of 1Q
GDP growth slumping to a
record low. This matters -- the
country accounts for 14% of
global crude demand.
Oil prices decline because of
either weak demand or increased
supply. These two factors affect
equity prices differently,
meaning we can use stock price
changes as an instrument to
separate oil demand shocks from
supply. Weak demand due to a
slower global economy would
lower both oil and equity prices.
But a supply boost would reduce
oil prices while lifting equities --
lower energy costs make
corporates more profitable.
If both oil and equities move in
the same direction (higher or
lower), that indicates a demand
shock. But if they move in
opposite directions, that signals
a supply shock.
In this insight, we used Hong
Kong’s Hang Seng Index for
equities and the price of Brent
crude for oil. Hong Kong is the
country with the highest
economic exposure to China and
its companies are likely to be the
the most heavily impacted by a
Drivers of Oil Price
Source: Bloomberg Economics
virus-driven Chinese slowdown.
We replicated the analysis using
Korea’s KOSPI index -- the other
country sensitive to Chinese
growth -- and the results were
broadly the same.
In terms of procedure, we split
the trading day into 15-minute
intervals and look at the co-
movement between oil and
equities within each of these
windows. If they move in the
same direction, we attribute the
oil price move to demand. If they
move in opposite directions, we
attribute the oil price change to
supply. We assume that in any 15
-minute period oil prices are
affected by demand or supply,
but not both.
We treat non-trading hours as
one long interval and attribute
the oil price move then to either
demand or supply, depending
on the co-movement with
equities as above.
17
Bloomberg Economics

U.S. Recovery Can Fight Virus

Without Fed Medicine
By Andrew Husby and Yelena Shulyatyeva

At the January FOMC meeting,
Federal Reserve Chairman
Jerome Powell acknowledged
that the coronavirus could
potentially impair global growth.
In the U.S., we expect travel and
tourism spending to be
impacted, while disrupted supply
chains and diminished sentiment
could be substantial.
The Fed could be pressured to
recalibrate policy, albeit
reluctantly ahead of the
November presidential election,
if the coronavirus spreads more
than anticipated and drives the
yield curve to invert or sparks a
severe equity market correction.
At present, we do not believe the
outbreak will prompt a “material
change” to the economic outlook
that could alter Fed policy.
and reduced air travel will impact
supply chains. China-sourced
disruption could be more
significant than the travel
impacts, though from a U.S. GDP
perspective, the negative effects
of an inventory drawdown could
be offset by a matching decline
in imports.
China’s economy is far larger and
more service-oriented than it was
in 2003, which could exacerbate
the local damage. U.S.-China
export targets contained in the
phase-one trade deal are in
greater jeopardy.
The perception of negative
demand impacts are the likely
culprit for recent oil and
commodity price declines. Oil
market supply shocks were the
main concern for the Fed in
2003, generating volatility in
March of that year as war
commenced in Iraq.
Confidence will be key. Lower oil
and gasoline prices may only
provide a limited upward thrust,
in contrast to the SARS outbreak
in 2003 when Iraq war-related
relief caused sentiment to surge.

FOMC transcripts around the Tourism Output Growth

time of the 2003 SARS outbreak
show limited direct cause for
action, but that virus did
Percent Q/Q SAAR

Percent Q/Q SAAR

explicitly factor into lower growth

projections ahead of an
insurance rate cut in June 2003.

Barring significant contagion, the

direct impact of the coronavirus
on tourism and travel spending is
likely to be limited to 0.1-0.2
percentage points of GDP
growth in the first quarter.

Beyond that, virus quarantines Source: BEA, Bloomberg Economics

18
Bloomberg Economics

What Coronavirus Shock Means

for ECB, BOE
By Jamie Rush

The SARS pandemic of 2003 was
something relatively unimportant
happening in a distant land, at
least that's the impression left by
transcripts at the time of
European monetary policy
meetings. But with China now
more deeply enmeshed in the
global economy, the European
Central Bank and Bank of
England can't afford to be so
complacent. We gauge the
possible impact on the European
economy and what it means for
policy.
We consider a scenario in which
the coronavirus outbreak is
contained -- this significantly
depresses activity in China in 1Q.
A global economic model shows
a drag on Europe’s GDP growth
of between 0.1 and 0.2 ppts in
the quarter.
The coronavirus impact alone is
unlikely to prompt the ECB or the
BOE to ease, although at the
margin it could tip the balance.
In an earlier scenario analysis, we
estimated the impact of the
coronavirus epidemic on China’s
economy. We assumed that the
impact would be severe, but
short-lived. We drew from
evidence on the impact of the
SARS virus on consumption and
investment activity in China. In
today’s economy a similar
degree of disruption might be
consistent with growth slowing to
4.5% from the 5.9% we forecast
before the outbreak. Chinese
officials are themselves
considering whether the target
for economic growth this year
should be softened and if more
stimulus measures are needed.
Assuming the virus is contained
relatively quickly, this will
concentrate the impact in the
first quarter of this year. To
assess how the economic shock
might ripple out across the
globe, we used NiGEM, a
structural model of the world
economy. This takes into account
China’s increased economic
weight and deeper integration in
the global trading system since
the SARS virus of 2003. The
shock transmits through a sharp
reduction in Chinese imports and
the chart below illustrates how
the GDP impact might be felt
across Europe’s largest
economies.

Growth Impact in 1Q May Be Detectable, Temporary

 Global supply chains could
also be disrupted if China’s
factories stay closed,
although the impact is likely
to be smaller than that
caused by reduced Chinese
import demand.

 Harder to pin down is the

impact stemming from
sentiment, uncertainty and
financial markets. From these
sources, we expect a modest
additional drag. Source: Bloomberg Economics

19
Bloomberg Economics

Virus Clobbering Hong Kong,

Japan, Asean
By Qian Wan, Yuki Masujima and Tamara Henderson

Hong Kong's 4Q GDP data
showed the economy remains
stuck in recession with continued
social unrest leaving the city
especially exposed to the
potential shock from the
outbreak of the coronavirus in
mainland China. Even if the virus
is contained in Hong Kong, as we
expect, it will weaken sentiment
and demand, dragging further
on the local economy.
We forecast the city’s 2020 GDP
will decline by 0.4% year on year,
with 1Q GDP dropping 4.7% year
on year. Hong Kong’s GDP
contracted 1.2% in 2019 from
2018 -- its worst performance
since the global financial crisis.
Japan
Japan's tourism industry, like
many in the region, looks set to
be clobbered by China's
suspension of package tour sales
as it battles to curb the spread of
the new coronavirus. The SARS
episode in 2002-2003 provides
the closest comparison. Taking
into account structural changes
in the economy since then, we
think the impact on growth will
be negative, but manageable.
Chinese visitors accounted for
30% of tourist arrivals in 2019 --
up from less than 10% in 2003 --
and 40% of total spending by
foreign tourists. In our baseline
scenario -- where the hit to
inbound tourism is half that of
the SARS impact -- a drop in
Chinese visitors leads to a
decline in the total number of the
foreign tourist arrivals in 2020,
even with the Tokyo Olympics
providing a boost.
Asean
Asean central banks may see the
threat from the coronavirus as
more insidious than the SARS
outbreak 17 years ago. Back in
2003, the region’s monetary
authorities leaned on liquidity
support. This is a more flexible
tool to handle a temporary shock
to growth. This time around, less
than one month into the
disruption, the policy response
from the region’s more open
economies already appears more
aggressive.
Central banks often look through
temporary shocks, especially
when risk of collateral damage to
the inflation target appears
limited and governments have
policy space to deploy support.
Japan’s Tourist Arrivals - Three Scenarios
Source: Bloomberg Economics
The aggressive response by
governments to contain the
coronavirus and the public’s fear
of exposure will stunt demand in
1H, but a rebound of pent-up
demand will likely follow.
Even so, the Bank of Thailand
already cut the policy rate this
month, shedding its prior
reluctance to deplete
conventional policy ammunition.
Another rate cut in 1H is likely.
The Monetary Authority of
Singapore earlier this month
hinted that further easing is in
the pipeline. What’s more, the
subsequent softening in the
Singapore dollar against trading
partners has increased policy
space.

20
Bloomberg Economics
Tackling the Virus Impact in
Stages— Policy Map
By Chang Shu and David Qu
The coronavirus outbreak has
upended China’s economy just as
it was regaining its footing after
some cooling in the trade war --
with huge implications for macro
policy. We present a map to help
navigate the policy shifts ahead.
Bloomberg Economics expect
measures to address four
priorities that will evolve over
time -- emergency support,
restoring production, applying
macro stimulus, and providing
targeted support for the most
hard-hit sectors.
The intensity of support in each
area is likely to vary at different
stages. The government is well into
the first stage and heading into the
second. As it gets a grip on the
outbreak, the focus should shift
toward growth support.
The policy timeline assumes the
virus is largely contained in 1Q
and would change if the
outbreak lasts longer.
The policy response is likely to
be staggered. Emergency
measures have already been
rolled out. Alongside continuing
virus-fighting efforts, China is
moving to restore production
outside the virus epicenter.
Macro stimulus is likely to start
with monetary easing, with a rate
cut expected later in the month.
Fiscal stimulus -- the main means
to lift growth -- should start to
kick in with more force possibly
as early as mid-March.
Targeted measures will be key
throughout, with the focus
broadening from the current
priority of ensuring adequate
supplies of medical and daily
necessities to the more affected
parts of the country.
China has rolled out a blitz of
drastic measures since mid-
January to try to contain the virus
-- locking down large parts of
Hubei province, extending the
Lunar New Year holiday, and
imposing restrictions on travel
and social events. It’s too early to
be definite, but new virus cases
appear to be peaking, according
to daily data provided by the
National Health Commission.
Importantly, the majority of the
cases remain in Hubei. Virus
containment will remain a priority
for now. That’s particularly so for
Hubei province in the next
couple of months but also for the
rest of the country as businesses
get going again and people start
returning to work. Geographic
containment is important to
localize the economic impact to
the extent possible.
While virus-fighting measures are
still intensive in Hubei, the policy
focus has started to shift to
restoring production and
normalizing economic activity in
the rest of the country. Premier Li
Keqiang signaled the shift into
this phase on Feb. 6. Efforts to
restore production will
face considerable challenges in
the coming weeks.
The travel restrictions that have
helped curb the spread of the
virus create wide-ranging
obstacles to production -- from
purchasing raw materials to
distribution, and from the
movement of people to
movement of goods.
Virus prevention requirements
place additional hurdles to re-start
production. In some areas firms
need to get permission to restart
facilities. Many firms face
considerable funding issues. Policy
21
Bloomberg Economics
There’s a risk of the NPC being delayed.
Even so, that wouldn’t necessarily put the
brakes on stimulus.
work for restoring production is
likely to be intensive between now
and mid-March. Production of
medical and daily necessities and
arranging logistics to ensure
delivery have been a priority over
the past few weeks. In the coming
weeks efforts will increase to help
other parts of the economy return
to normal functioning.
The measures are likely to
involve unclogging
transportation and logistics
channels, helping companies
strengthen safeguards to contain
the virus, and reducing the
financial burden on firms.
The policies are likely to be
flexible -- calibrated based on
the extent an area or sector is
affected and the risk of the virus
spreading.
Monetary policy will probably take
the early lead in macro stimulus.
We expect the one-year Loan
Prime Rate -- the reference for
bank lending to companies -- to fall
40 basis points over the course of
the year -- more than the 20 bps of
reductions we expected before the
virus struck. The first cut will likely
come on Feb. 20. We expect a 10-
15 bp move -- deeper than a 5 bp
increment for the last two rate cuts.
What’s fairly clear -- the PBOC
isn’t set to slash rates
aggressively. It has signaled as
much. Growth needs to be
supported. But the central bank
hasn’t taken its eye off financial
22
stability considerations. While
cautious in easing, the central
bank is likely to be proactive in
providing liquidity support,
ensuring smooth functioning of
the financial system, and
delivering targeted credit
measures to the most affected
areas and sectors.
Fiscal policy will probably do the
heavy lifting for growth support.
The government is likely to deliver
this stimulus after the virus is
broadly under control and
production has returned closer to
normal. A stimulus package may
come as early as mid-March, in a
scenario where the virus is largely
contained within the next few
weeks. This would be ahead of the
National People’s Congress, which
is usually held each year in early
March.
There is a risk of the NPC being
delayed. Even so, that wouldn’t
necessarily put the brakes on
stimulus. When battling the
global financial crisis, China
unveiled its 4 trillion yuan
stimulus in November 2008 --
less than two months after
Lehman Brothers collapsed --
and it did not tie the
announcement with the NPC.
We expect the fiscal package to
consist of increased
infrastructure spending, tax
relief, and other forms of support
for the most affected regions,
sectors and groups.
To accommodate the extra
spending, the government may
widen its budget deficit target
from 2.8% of GDP in 2019 to 3%
for 2020 -- the widest target
ever. And it could provide extra
stimulus by increasing the quota
for special bond issuance --
which would give provinces more
space to boost spending on
infrastructure. Given the need to
maintain financial stability, the
stimulus is likely to be powerful
but not excessive. During the
global financial crisis, the
government threw open the
floodgates. This round will
probably be more targeted.
Some targeted measures are
already in place. Many more are
likely to follow, tailored to
complement broader policy
initiatives and address changing
needs as circumstances evolve.
The initial targeted groups, in
production and financial support
are medical related -- reflecting
the priority of containing the
virus and supporting medical
requirements. Over time, as the
policy focus shifts toward growth
support, the targeted measures
are likely to expand in scope.
Small private firms -- which were
under stress before the virus
outbreak -- are likely to be one
key group to support. Measures
may come in the form of tax relief
and fee reductions, and
permission to delay tax and
social security payments for the
most affected regions, industries
and groups.
Bloomberg Economics

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