it is Expected that the problems caused by the coronavirus in the global supply chain, will affect different countries.
Nassim Taleb, a former trader who is interested in the science of statistics, first proposed the term “black Swan”, which is used to determine the unpredictable, rare events that can have a profound impact on the financial world and the global economic system.
In connection with the impact of trade wars, Brexit and geopolitical problems the world economy is experiencing difficult times. It is quite possible recession and economic slowdown. One of the problems is the fear of the scenario of the “Black Swan” that will further worsen an already unstable world economy. The recent outbreak of the novel coronavirus in Wuhan put forward the possibility of such a scenario, increasing concern about the global economy.
the Impact of such outbreaks are evaluated primarily from the point of view of their influence on exchange. And it’s quite an erroneous position. Financial markets react sharply on the flow of information about these unexpected events. The increase in the number of deaths can lead to cost reduction of 10% in the stock markets. On the other hand, even a drop of good news can turn into a buying opportunity. Since we are talking about China, the “factory of the world”, it is advisable to assess the impact on the supply chain, foreign trade and real sector channels.
to fully understand the possible consequences, one of the most recent cases to consider, should be the outbreak of SARS in 2003. Due to the impact of SARS, real GDP fell by 2 percentage points in the second quarter of 2003.
Despite this, through packages of economic stimulus by the Chinese government, export growth and a decline in demand in the markets at the end of the year, the Chinese economy finished 2003 with a growth rate of 10%. It is assumed that because of SARS, real GDP decreased by 0.1 p. p. slowing down the worldthe new economic growth.
implications of the new coronavirus can be even more severe than the consequences of SARS. China’s economy offset a decline in domestic demand in the second quarter of 2003, exporting more goods and services. Consequently, in 2003, the pace of China’s exports increased by 35%. The fact that in 2001, China became a WTO member, has also played an important role in this export performance.
However, China no longer has the same radius of action, which would allow it to increase its exports in significant quantities. In recent years, China has undergone a transformation, moving from growth model based on exports to a model dependent on domestic demand. The share of domestic demand in the structure of growth is now much more than in the past.
Accordingly, the coronavirus will slow down domestic demand, which will have a more pronounced impact on economic growth. In the economic sphere, epidemics and natural disasters have the greatest impact on services. Over the last 20 years the importance of the service sector in the economy of China grew from 40% to 50%. This shift can lead to a stronger impact of coronavirus on the rise compared to 2003.
compared with 2003, China’s foreign trade today is 5 times more the number of tourists sent abroad, in 6 times more, its share in the global economy also increased in 4 times. It is not surprising if events in China will affect the world economy stronger than 17 years ago.
SARS occurred at a time when the risks in the world economy was below the willingness to invest higher trading volume grew. But now, along with the uncertainty and high risks, an era in which global growth and trade volumes do not grow because of trade wars. The deterioration of expectations in the world economy can enhance the impact of the virus.
as far As these factors will increase the negative impact of coronavirus on the economy compared to the SARS virus? Referring to the scenario in which you will be able to control the outbreak of coronavirus by April, Shang-Jin Wei of Columbia University made a very optimistic forecast that the impact of coronavirus on economic growth in China will be limited to only 0.1 p. p. International financial organizations are predicting that the Chinese economy will lose the growth on average 0.5 percentage points Pessimists predict that China’s economic growth will decline by 1 percentage point Predictions about the overall loss of world economic growth due to coronavirus ranging from 0.02 percentage points to 0.03 p. p.
Along with uncertainty about risks associated with the virus at the moment it is difficult to anticipate the consequences of government policy of Beijing on the recovery of economic activity. For this reason, it is difficult to predict the situation for the whole year. In these uncertain times we must remain cautious with forecasts of annual growth.
What countries it will affect and to what extent?
On the basis of current data it is reasonable to predict the situation in respect of the first quarter, not the whole year. According to forecasts of Bloomberg Economics, the world economy may lose 0,416 p. p. in the first quarter of 2020. Being United with China, in terms of Finance, logistics and delivery of goods, Hong Kong is one of the most probable countries which affect the effects of coronavirus.
China’s Slowdown means a reduction of exports, and it will affect the major exporters, such as Brazil and Australia. The growth of South Korea is dependent on China in the major products in the first quarter of the year could reach 0.4 percentage points, less than expected.
due to shortcomings in the supply of goods from China, the South Korean car company decided to suspend its activities. It is expected that the problems caused by a coronavirus, a violation of the expectations of the global supply chain will have a negative impact on the US and various EU countries. It is expected that among the EU countries, the coronavirus most likely to affect the German economy.
potential impact on economyMiku Turkey
Since the dependence of the Turkish economy from China is smaller compared to other G20 countries, the impact of the virus on the Turkey can be relatively smaller. The slowdown of the global economy and trade volumes could slow the growth rates of export in Turkey. On the other hand, the foreign trade deficit of Turkey with China may escalate. The lower expectations of global growth will reduce and the price of oil. The fall in oil prices below $55 — a positive factor from the point of view of inflation.
in addition, the number of tourists from China to Turkey, which has increased significantly in recent years, may be reduced. This scenario will have a negative impact on the account balance. A certain part of the global liquidity coming from the emerging Asian markets can be transferred to Turkey as an alternative market.
Being restricted, this kind of cash flow will continue to have a positive impact on the markets. If expectations about the impact of coronavirus on the world economy deteriorates, a significant Central banks such as the fed and the ECB, will go to additional monetary expansion. Such a political move will give Turkey more opportunities for playing with point of view of interest rates and currency markets. Final and concrete results of this possible impact will depend on which actors will be stronger and more powerful in the process.
the Most perilous scenarios
There are 3 risky scenarios that will strengthen the impact of coronavirus on the global economy. The first significant risk: the possibility that at the end of the second quarter will not be able to fully gain control over the coronavirus. As the temperature in spring increases the likelihood that the virus will go on recession, can lead to the fact that this scenario is not implemented.
the Second risk: the growing social tensions in China due to coronavirus and overreaction of the government of Beijing to the situation. The Chinese authorities are more transparent in comparison with their reaction to inthe spyshka SARS in 2003. In such a serious situation it is not easy to keep under control the issues related to the development of the disease, the first and most important of which relates to the quarantine.
In this regard, the government of Beijing has done a good job. If such a situation happened in a Western country, it would be difficult to keep the situation under control. Therefore, the probability of increased social tension and that everything will come out from under the control of the government of Beijing small.
the Third risk: it may occur if Beijing misses imported products, which he guaranteed will purchase from US in the first phase of the agreement, which will lead to stupid reactions of the US President Donald trump (the threat to raise rates).
In his statement on the issue last week trump said he would comply with the requirements of the agreement and that he fully believes in bridging the China situation with the coronavirus.
However, the trump more than once or twice abruptly changed decisions on certain issues. It would be unwise to fully trust him in this matter. There is no guarantee that he will not be able to beat China and to use this situation to their advantage during the election campaign 2020.
Financial markets “are not considered” with these high-risk scenarios that are unlikely, but very scary. As mentioned above, it is wise to maintain caution against the growth forecasts in connection with the above-mentioned uncertainties. However, predictions based on limited data, suggests that in 2020 it is very likely the lowest growth rate in China since 1990, along with a lag in global growth, with a decline below 3%.