Business

'Impossible' to predict far-reaching impact of China virus outbreak

Workers disinfect closed shop lots yesterday following the coronavirus outbreak in Jiang'an District of Wuhan in central China's Hubei Province

CONCERNS about the economic impact of the coronavirus dominated trading last week, and Monday saw markets in China plummet when they re-opened after the extended new year break.

At time of writing the number of people infected is over 40,000 with official figures showing just over 900 deaths. Most of these are in China and it seems that the rate of spread is falling, although according to the World Health Organisation it is too soon to say that it has peaked.

In order to gauge the impact of this virus, many comparisons are being drawn with Sars, the respiratory virus that saw an outbreak in 2003 which led to 774 deaths. This virus has overtaken that outbreak in terms of numbers affected and although there are positives that can be taken - most notably the more open approach by the Chinese authorities – one crucial point to note is the difference in standing of the Chinese economy on the world stage.

In 2003 it was estimated that Sars reduced economic growth in China by 2 per cent in the second quarter of the year, or 1 per cent for the year as a whole. But China then accounted for about 4.3 per cent of global output and it is estimated that this figure will have increased to 16.9 per cent for 2020. In addition, the rate of growth of the Chinese economy was 10 per cent then, compared with 6 per cent now.

One impact which is already being felt is the robustness of global supply chains. This reflects the unavoidable fact that China is at the heart of many global supply chains now. Fiat Chrysler has warned that one of its European plants could be forced to halt production within a fortnight.

China is the world's largest importer of oil and consumes half the world's metals and as a result oil, copper, iron ore and coal prices have all been hit as have soybean and cattle prices. Oil stocks around the world have seen a significant impact on their share prices, for example Royal Dutch Shell saw its share price fall 13 per cent between 20 and 31 January and BP's was down by 8 per cent.

The likelihood is that the drop in demand will be temporary and suppliers are considering cutting production to cover this; on a more optimistic note there are predictions of a strong rebound in early summer.

Other impacts include the reduction in demand, not only in China, where there has already been a dive in retail, leisure services and tourism, but as restrictions on travel begin to bite, we may see a fall in income for the tourism sector and luxury brands. With the rate of global economic growth at a modest 3 per cent in 2019, if fear takes hold of public attitudes, growth could easily fall markedly this year.

So far, the markets have taken all these concerns in their stride, the FTSE 100 was up 2.5 per cent on the week and the Dow Jones finished the week 2.7 per cent higher.

In China the markets were down on the week, but after the initial sharp fall, they regained ground to finish about 2.5 per cent lower. It remains to be seen how far reaching the long-term impact of this outbreak will be on the world economy and it is impossible to predict at this juncture.

:: Cathy Dixon is a partner at the Belfast office of Cunningham Coates Stockbrokers. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.

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