Coronavirus: 'Black Swan' of Global Economy; How it Impacts India?

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The recent outbreak of the coronavirus that emerged in Wuhan city of China brought forward the possibility of further economic slow down thereby increasing concerns about the global economy, apart from the sever impact on human lives. China has allocated more than $10 billion to contain the coronavirus. Many China provinces have shut businesses for weeks now and it is not certain whether they will re-open anytime soon.

 

The growth rates due to this virus for numerous countries have been cut. S&P Global Ratings has cut China's 2020 growth forecast to 5 per cent from 5.7 per cent.

 

Nine out of the top 10 countries in Asia are vulnerable to the virus and they include India. Hong Kong, Singapore, Taiwan, Japan, South Korea, Thailand, Malaysia and the Philippines.  

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Impact on India
The impact of Coronavirus outbreak in China could be negative, if the selective steps are not taken. India could turn this problem into an opportunity also with more exports and achieving high growth rate. Let us discuss the negative and positive impact both briefly:

 

Negative Impact on Indian Economy
India faces a series of challenges due to the coronavirus outbreak. Pharma companies, mobile handset, consumer electronics and automobile sectors in India may witness lower production due to clogged supply from China.

 

Sunil Damania, CIO, MarketsMojo.com has outlined the possible risks and said "If the outbreak continues for longer than anticipated than risk will not be restricted to a few sectors, but it can hurt the overall Indian economy. The sectors that would be immune will be Banks, Insurance, IT as they will have fewer headwinds to face due to coronavirus."

 

So, there is a great danger that world economic growth could take a beating due to the virus as China accounts for 12 per cent of world's GDP growth rate. Besides, there could be an indirect impact on many outside China producers who source their raw materials or components from China..

 

The corona virus outbreak made RBI Governor Shaktikanta Das take note and suggest the need for a contingency plan to deal with the unfolding situation. According to Jimeet Modi of SAMCO Securities, “The overhang of Coronavirus will largely drive the mood of stocks in the short term. Investors are advised to wait and let the market settle down before allocating any meaningful savings to direct equities.”  

It implies that if the global environment remains weak, commodity prices would fall, as is the case with the 20 per cent drop in crude oil prices, which should benefit India. However, India is not immune to a global slowdown. UBS said reports of the virus contagion have contributed to investors' concerns during its marketing trip.
 

The report said, “Potential similarities between the Wuhan virus Coronavirus and SARS in 2003 have led many investors to question the extent of the impact on India. At this early stage, we only see a negligible economic impact, but India is not immune. India's tourism contributed only 1 per cent of GDP in FY19. But, China is India's third-largest goods export partner ($17 billion; 5 per cent share in India's exports). Any likely slowdown in growth in affected Chinese cities could result in a further drag on raw material demand from India and thus could drag exports further.”
 

Opportunity for India: Positive Impact
Economists are of the opinion that the disruption caused by the virus in China could pave way for more foreign investments in emerging economies like India, Bangladesh, and Vietnam as the world looks to reduce dependency on China, the largest manufacturing hub in the world.

 

Experts feel that India has a good chance of becoming an attractive manufacturing hub given the present situation, provided the government changes some of its trade policies to bring down commodity prices. An example of Vietnam, which has gained a huge growth boost due to higher density of electronics manufacturing, is before everyone.

 

H Nemkumar, Head - Institutional Equities, IIFL, said that ill-fated coronavirus outbreak in China has offered India with an opening to revive the 'Make in India' programme.

 

According to the Chief Economic Advisor of India, Krishnamurthy Subramanian the coronavirus outbreak in China provides an opportunity for India to expand exports. India is one of China's leading trade partners in Asia and has a huge trade deficit with that country.

 

Sharing his views at IIM Calcutta, Subramanian said, “The coronavirus outbreak in China provides a good opportunity to India to expand trade and follow an export-driven model."  He said that China imports a lot of components, parts, assembles and integrates and then exports them.

"India has been following the same pattern in terms of mobile manufacturing in the country. So, if one looks from this perspective, it provides a good opportunity for India." said Subramanian
 

Coronavirus Vs SARS
The impacts of the coronavirus, also called the “Wuhan virus,” could be felt more deeply than that of SARS outbreak in 2003.

 

SARS claimed 774 lives globally in 2002-2003. However, the latest data from global health authorities show that Coronavirus has infected more than 43,000 people globally and out of them, 42,638 are confirmed cases in mainland China, with the toll surpassing 1,000 deaths. It could be turning into a Pandemic than the epidemic.

 

Despite the SARS outbreak, 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. The economic stimulus packages by the Chinese government 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.

 

Coronavirus: A Black Swan for Global Economy
Nassim Nicholas Taleb, a former options market broker 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.

 

Impacts of such outbreaks like Cornonavirus, are interpreted primarily through their impact on exchanges. 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.

 

The impacts of the coronavirus could be felt more deeply than that of SARS. China no longer has the same radius of action that would enable it to increase its exports in  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 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.  

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Impact on World Economy
Disturbance caused by Coronavirus has affected key sectors like global tourism, trade, manufacturing and export/import. But the biggest jolt has come from the shutdown of many businesses--from major retail chains to automobile and smartphone manufacturing firms--in mainland China.

 

As a result, countries that have a high dependency on China for goods--especially small components and parts--have suffered. Market experts fear that the world's over-reliance on China will continue to hurt global growth until the virus is contained.

 

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.

 

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.

 

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. 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 Risky 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.

 

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.

 

There is a high chance of China experiencing the lowest growth rates after 1990, along with falling behind in global growth, dropping under 3%.

 

Pitching India as Strong Investment Destination
A recent surge in order queries has been received by Indian traders across various domains. Trade analysts expect more investment opportunities for emerging economies in the backdrop of the coronavirus outbreak in China.

 

However, it now remains to be seen whether the government can ease policies and pitch India as a strong investment destination for major companies around the globe. . Read More GD Topics

 

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