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COVID-19 Coronavirus - The Big Picture

As the death toll continues to rise and the number of reported cases rises around the world, it is clear that the COVID-19 Coronavirus pandemic has the potential to cause material economic harm around the world.

The World Health Organisation (WHO) has declared the COVID-19 Coronavirus outbreak a global emergency. The decision came as the death toll continues to climb, with the infection spreading not only in China, but other countries around the world.

Impact in China

China’s economy has changed since the SARS epidemic in 2003 that killed some 800 people worldwide, and shaved 0.5 to 1 percentage points off the country’s growth that year. The latest virus outbreak in China has come at a time when its economy has grown larger and established greater connections with the world. That means any pressure on China’s growth now would hit the global economy harder than before.

Since 2003, China has grown from the world’s sixth-largest economy to the second biggest today behind the United States. The country has been a main growth driver worldwide, with the International Monetary Fund estimating that China alone accounted for 39% of global economic expansion in 2019.

Now, China accounts for nearly a-fifth of global growth. China slowing by half a percent would be serious.

As with the SARS outbreak 17 years ago, the spread of the COVID-19 Coronavirus is likely to first hit consumer spending. But the decline in consumption this time could be more severe than 2003, some analysts said, especially after authorities shut down much of China in a bid to contain the virus.

In 2019, China’s full-year GDP growth was 6.1%, down from 6.6% the year before. China’s economic growth is also going through a structural deceleration due to an aging population and is at the end of a long urbanization process.

Economic growth in China in 2020 is expected to come in lower than earlier projected, due to a pullback in household consumption.  This is the result of the lockdowns and travel restrictions implemented in several major Chinese cities, to contain the spread of the virus. COVID-19 Coronavirus will impact on the country's consumers and merchants, and will hurt its revenue growth in the current quarter. Alibaba, the first major Chinese technology corporation to report results since the epidemic emerged in January 2020, said the virus is undermining production in the economy because many workers can't get to or perform their jobs. It has also changed buying patterns with consumers pulling back on discretionary spending, including travel and restaurants.

While widespread home confinement is spurring demand for online services, from grocery delivery to office apps to streaming entertainment, the means of production in the economy and logistics has been hampered by the delayed opening of offices, factories and schools after the Lunar New Year's holiday.

Industrial production has also been disrupted because of work stoppages and delays arising from these containment measures. These developments in China will, in turn, have a knock-on impact on regional economies, including the ASEAN economies, through lower outbound tourism and other import demand from China, as well as disruptions to supply chains.

World Impact

On the trade front, rising demand within China has made the country the world’s second-largest importer since 2009, data by the World Trade Organization (WTO) showed. Demand for those goods could slump alongside a slowdown in the Chinese economy

China has been the world’s top exporter since 2009, climbing from fourth place in 2003, according to data by the WTO. Countries such as Japan and Vietnam have a huge amount of reliance on the Chinese supply chain, as those economies import materials and parts from China to make their own products to export. Not only will China slow and have impact on the global demand, these countries which rely on China for intermediate inputs will also be affected. There could also be sharper pullback in global consumption if the outbreak is more severe and protracted than expected.

This will also add momentum to some changes in global supply chains that were already underway. Along with Chinese workers’ rising wages and the prospects of further U.S.-China trade tensions, the epidemic is likely to cause multinational companies to reassess their supply chains and reduce their production footprints in China.

The coronavirus epidemic might have only a limited immediate impact on the U.S. economy, but by creating further uncertainty and disrupting supply chains in Asia, it will add to the long list of factors likely to hold back U.S. and global growth in 2020. The temporary boost in business sentiment and investment that could have been expected from the U.S.-China trade deal last month, is going to be offset by this new cloud of uncertainty over global trade. A worldwide recession is not yet on the cards but, at a minimum, the added uncertainty will restrain investment and productivity, in all major economies.

Impact on Australia

In the first month of the year, Australia saw significant drought and the worst wildfires in its history, which decimated native wildlife and produced about 900 million metric tons of carbon emissions. In what would ordinarily be high tourism season, visitor numbers have slumped due to the fires.

Since 2014, China has been the largest source country of international tourism expenditure, climbing from seventh place in 2003, according to the World Tourism Organization. Travel bans and flight cancellations put in place since the emergence of the COVID-19 Coronavirus could curtail Chinese tourism spending overseas. This is a shared threat amongst many economies. The Australian Government has implemented strict new border control measures in an effort to halt the "escalating threat" of the COVID-19 Coronavirus on our shores.

But with 52,000 Australians visiting China yearly, and the Chinese tourist market generating about $20 billion annually for Australia, the restrictions are likely to affect a large amount of Australians and their families.

In addition, for travellers coming from Europe and Asia alike, mainland China is an obvious and convenient stopping point. But due to the crisis, only Australian citizens are currently allowed to board flights to Australia out of China, sending daily visitor numbers into Melbourne down to about 700 from the usual 5,000. Under normal circumstances, more than 100,000 Chinese tourists visit Australia each month.

Travel agents and airlines warn there is no doubt the virus will have a negative impact, but just how much is unclear. The first wave of economic disruption hit airports, airlines, travel agencies, casinos, hotels and educational institutions.

Now, as many factories in China remain closed, the virus is having a second wave of economic chaos, disrupting business supply chains and hurting revenue.

Australian-listed companies and major global retailers that rely on stock from China — or operate in China — are already feeling the impact and warn the situation could worsen in the coming months. A number of Australian-listed companies have slashed their profit forecasts off the back of the COVID-19 Coronavirus.

The Reserve Bank of Australia is likely to downgrade its economic growth forecasts and the federal budget position will slip further as the impact of COVID-19 Coronavirus and bushfires sink in. The outlook has become increasingly difficult for the central bank because while there has been improvement in employment, inflation, house prices and exports, these positives are likely to take a hit from the COVID-19 Coronavirus and Chinese restrictions on travel.

Sectors including tourism and education are likely to suffer billions of dollars worth of damage if the Morrison Government keeps travel bans in place for more than six months, while the price of another key export to China, iron ore, has fallen by more than 10% in a month.

The RBA expects the ongoing drought to cut 0.25 percentage points from growth this year. Fires would cut economic growth by about 0.2 percentage points in the December quarter and the current quarter, however taking into account the expected rebuilding effort, government grants and insurance payouts, the fires would not affect economic growth across the whole year.

Wine

As a result of the COVID-19 Coronavirus there are significantly less people leaving their homes. Most restaurants, bars and other venues have remained closed since the commencement of the Chinese holiday period. This will obviously mean a slowing of overall consumption.

Office workers, plants, processing and manufacturing facilities are also being impacted by these closures with the closures being enforced. While these restrictions had been announced to finish on 10 February 2020, there are still concerns and uncertainty around these businesses returning to normal.

Except for the main Port at Wuhan, no additional port closures have been announced to date. Despite this, ports are seeing a slowing due to the limited staffing through the closures. Internal logistics are also slow and even once staffing returns to normal, we should expect some continued slowing in shipping, due to build-up of containers at port and slow processing over this time.

It is still too early to understand the impacts on wine imports and/or demand. No major disruptions to orders have been seen by the sector to date. The main concerns for wine centre on less eating out and general consumption reductions. Importers ability to draw down on existing stocks could limit new orders in future, however it was still too early to tell what the limited consumptions impact would be. Slowing of port processing may also be a concern.

 

Australian Grape & Wine

18 February 2020