World War V
The author is a professor of economics at Korea University.
A new Chinese coronavirus — a cousin of the severe acute respiratory syndrome (SARS) virus — has been rapidly sweeping across the globe since it broke out in Wuhan, Hebei Province, China. Over 24,600 have been confirmed infected in 26 countries as of Wednesday, with the death toll in mainland China hitting 493. Like the SARS in 2003, the epidemic is contagious and originated from China. The earlier disease killed 349 in China and 299 in Hong Kong and spread to 17 countries by July 2003 after it started in Guangdong Province in November 2002.
A disease contagious to humans can cause take lives, result in productivity losses and lead to high medical cost. It can also take a toll indirectly on the economy. Travelers numbers decrease to avoid coming in contact with others, hurting consumption and production. Services sectors like tourism, air transportation, hospitality and eatery businesses took a direct hit from the SARS outbreak. Investment sentiment also sours due to increased uncertainties. Hong Kong’s economy contracted in the second quarter of 2003 at the peak of the SARS epidemic, compared to the previous quarter. China did not disclose on-quarter GDP data, but was projected to have seen impairment in terms of consumption and production.
The latest outbreak is also likely to dent consumption and economy. The ramifications depend on how long the outbreak lasts or how fast China can combat the virus. The Chinese health system was in poor shape during the outbreak of SARS. The damage was greater than it should have been because the authorities hid the damage and acted too slowly. It alerted the World Health Organization (WHO) three months after the first patient. It remained suspicious this time, too, keeping information away from the media when the first patient was identified on Dec. 8 in Wuhan and the first death occurred on Jan. 10. China turned aggressive only when deaths increased and patients were reported in Beijing and Guangdong.
When taking into account the SARS event, China’s growth rate could be impaired in the first quarter. It may even contract against the previous quarter. If the spread is fully combated and the economy quickly rebounds from April, the impact on full-year performance could be limited. Disease and natural disasters can dampen demand and output temporarily, but do not undermine the fundament growth potential. The economy can rebound with the return of consumption and investment once the unexpected event dies down. The recovery can pick up speed through increased fiscal and financial assistance from the government. China may shake for a certain period, but can afford a quick turnaround.
But there is always a downside. If disease control is delayed and panic spreads, the impact on the economy could be greater. The shock could be more damaging as services and private consumption contribute more to the Chinese economy than in the past. When factories stay closed for a longer period of time and consumption in the private sector turns negative, the negative impact would enlarge. The setback has arrived at a time when the economy has lost steam in China, and heavy debt weighs on investment. Foreign capital also could pull out. Suspension of manufacturing bases of foreign names like Renault, Honda, GE and GM in Hubei could last longer, giving foreign capital more doubts about China amid rising labor costs and trade friction with the United States.
Many expect the virus outbreak from China could deal a blow to the global economy four times bigger than the impact of SARS in 2003. China’s share of global production, trade and consumption has significantly increased over the years. China’s share in global output has soared to 16 percent from 4 percent in 2003. About 150 million Chinese travel overseas a year, compared to 20 million in 2003. The troubles of China would have an explosive impact on the global economy which is more interconnected than decades ago. Even when China’s economy rebounds after a brief stagnation, the damages to countries with trade and business relationships with it could be big.
The epidemic has infected 23 Koreans, inspiring fear. The already fragile domestic demand could be further weakened. A slowdown in the Chinese economy could slow the recovery of our exports. While public safety and health must come first, economic actions are equally important. The government must expedite and broaden financial and tax assistance to companies in trouble and encourage e-commerce, online education, and work at home to keep up economic activity amid the outbreak.
Korea is vulnerable to Chinese shocks due to its geographic proximity and economic reliance. In the longer run, Korea must lessen reliance on China.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Feb. 6, Page 31