Global uncertainties had started to ease in 2020 with the fear of recession fading.
It came about after the United States and China signed a trade agreement that led to a vague pause in a trade war. The threat of open hostilities between the US and Iran returned to a deadlock. Although Europe remained stagnant, Germany escaped the recession threat.
But the outbreak of the coronavirus epidemic in China has struck at a point in time where the world’s economy is still at a vulnerable stage.
Hence, the world economy is now on an unfortunate platform in 2020.
In 2020, the US is expected to grow moderately.
Both Germany and the United Kingdom may have missed recession. Still, there is downside risk. And the last thing the global economy needs is a sharp slowdown in China.
Even prior to the coronavirus outbreak, the Chinese economy was expected to grow close to 6% in 2020, but this could be challenging now.
Malaysia, being a trading economy, is vulnerable to shocks. Unlike in 2003 where the economy grew 5.8% despite the outbreak of SARS supported by robust external demand and a strong private sector, today, external uncertainties and domestic challenges added with the coronavirus outbreak point to some downside risks for the economy.
The impact of the coronavirus will be felt in the services sector, especially in tourism-related businesses like accommodation, food and beverages, travel and transport, entertainment, shopping and miscellaneous services besides other sectors of the economy, indirectly or induced by it.
The combination of uncertainty and fear generated by the coronavirus will drive people to stay home to reduce the probability of an infection. It will weigh on private consumption and retail sales. However, the use of smartphones for payments, food ordering and other transactions every day may cushion the downside of private consumption and retail sales.
Investment will be affected from lower demand, heightened uncertainties and risks.
With manufacturing currently flirting with the “recession” mode, the outbreak of the coronavirus risks raising excess capacity.
Implementation of foreign investments’ may be delayed or reduced in reaction to the outbreak.
Raising government spending may be necessary to mitigate the adverse impact from the coronavirus, besides the ongoing external and domestic challenges which are seen as a drag on consumer and business sentiments. The question here is how much fiscal flexibility remains.
In the meantime, the coronavirus shock will induce global investors around the world to become more cautious. They will become more risk averse and it could unsettle global financial markets.
Demand for defensive assets will rise with stronger appetite for the Japanese yen and Swiss franc and strong interest on assets with high liquidity like US Treasuries which means the dollar will also gain some support.
Emerging-market currencies will be less attractive due to lack of liquidity. Affected countries’ currencies risk more upside against the dollar like Korean won and Chinese yuan. If the infections become more widespread and region-wide, currencies like Singapore dollar and Thai baht will suffer.
The ringgit will depend on the direction of yuan and oil price, besides the domestic policy measures instituted. Wider commodity prices would come under pressure and damage the Australian dollar. Gold would tend to gain. Chinese investors could be drawn to cryptocurrencies although bitcoin has lost some ground.
Furthermore, global central banks are expected to become more alert, including Bank Negara. They have been cutting interest rates over the past year in response to concerns over the trade and growth outlook, especially given the imposition of tariffs. Just as the central banks started to feel slightly more optimistic over the growth outlook, it is now being dented from the fresh unease of the coronavirus. As such, we foresee more rate cuts by the global central banks.
Past pandemics and other disasters had hardly any lasting effect on the global economy. Today, many countries are better prepared in pandemic management following the shortfalls identified in the 2003 SARS outbreak, with improved screening measures already in place around the world. A faster containment will stem the coronavirus outbreak; that should be more of a near-term disaster.
Furthermore, the implementation of effective containment measures against the coronavirus by China and a number of economies since January will provide support. It should gradually start curbing the coronavirus.
Already, millions of people have been quarantined, all forms of travel restricted, the long Lunar New Year holidays extended, with some tourist destinations closed.
But the impact from coronavirus outbreak on the economy will be felt in businesses like: (1) retail; (2) casinos and theme parks; (3) hotels; (4) airlines; (5) global carmakers which have started pulling foreign staff from plants across parts of China that have been hit by the coronavirus; and (6) global banks with significant operations in China that have been ring-fencing potentially exposed staff, putting in place travel bans, and disinfecting their Asia offices.
However, technology could prove to be a blessing in these difficult times. With the increasing use of smartphones for payments, food ordering and other transactions every day, it should help contain the coronavirus outbreak.
Delivery could still be done but at the “doorstep” instead of face-to-face.
In summary, the coronavirus is unfortunate for the global economy. However, based on past pandemics and other disasters, they had hardly any lasting effect on the global economy. So, in this case, there are strong possibilities this outbreak will be full blown by the second quarter of this year and thereafter starts to taper off.
Anthony Dass is chief economist/head of research, AmBank Group and Adjunct Professor, Faculty of Economics, UNE, Australia
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