Coronavirus could cost global economy $1.1 trillion in lost income

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LONDON (The Guardian) —The coronavirus could cost the global economy more than $1 trillion in lost output if it turns into a pandemic, according to a leading economic forecaster.

A currency trader watches monitors at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea, Thursday. Asian shares were mixed after Wall Street recovered to record highs, but worries continued about the damage to the regional economy from the new virus that began in China.  AP

Oxford Economics warned that the spread of the virus to regions outside Asia would knock 1.3% off global growth this year, the equivalent of $1.1 trillion in lost income.

The consultancy said its model of the global economy showed the virus was already having a “chilling effect” as factory closures in China spilled over to neighboring countries and major companies struggled to source components and finished goods from the far east.

Apple told investors earlier this week that it would fail to meet its quarterly revenue target because of the “temporarily constrained” supply of iPhones and a dramatic drop in Chinese spending during the virus crisis.

Carmaker Jaguar Land Rover, adding its voice to a chorus of companies complaining about supply problems, said it could run out of car parts at its British factories by the end of next week if the coronavirus continued to prevent parts arriving from China.

Oxford Economics said it expected China’s GDP growth to fall from 6% last year to 5.4% in 2020 following the spread of the virus so far. But if it spreads more widely in Asia, world GDP would fall by $400 billion in 2020, or 0.5%.

If the virus spreads beyond Asia and becomes a global pandemic, world GDP would drop $1.1 trillion, or 1.3% compared to the current projection. A $1.1 trillion decline would be the same as losing the entire annual output of Indonesia, the world’s 16th largest economy.

“Our scenarios see world GDP hit as a result of declines in discretionary consumption and travel and tourism, with some knock-on financial market effects and weaker investment,” it said.

Rival consultancy Capital Economics said the situation in China was still developing and it remained unclear how long before the quarantine rules across much of China’s central belt would lead to mass job layoffs and wage cuts becoming more widespread.

It said 85% of larger stock market-listed firms had enough funds to meet their liabilities and wage bills for more than six months without any further revenue.

But thousands of small and medium-sized or SME businesses, which are responsible for half of urban jobs, “may not heed government orders not to shed jobs.”

A survey of 1,000 SMEs conducted by two Chinese universities found that unless conditions improved, one-third of the firms would run out of cash within a month, the consultancy said.

Another survey of 700 companies found that 40% of private firms would run out of cash within three months.

The firm’s Asia analyst, Julian Evans Pritchard, said: “Our best guess is that there is still a window of another week or so during which, if economic activity rebounds, the bulk of employees including at vulnerable SMEs would probably keep their jobs.

“And with large-scale layoffs avoided, consumer spending would bounce back quickly due to pent-up demand, which in turn would help the self-employed and family-run businesses to recoup much of their recent loss of income.

“But with each day that the disruption drags on, the risk of a protracted slump in output rises. If activity is not clearly rebounding by the end of next week, we will revisit our annual growth forecasts.

Oxford Economics said it still expected the impact of the virus to be limited to China and have a significant, but short-term impact, bringing world GDP growth just 0.2% lower than January at 2.3%.

But a pandemic would cause a deeper and more profound shock over the next six months, possibly equal to a $1.1 trillion loss, followed by a recovery that would make up some of the ground lost earlier in the year

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