RIO DE JANEIRO, BRAZIL – The great “black swan” of the start of 2020, the coronavirus has come out of the blue to hit the market hard, knocking the stock markets around the world as cases began to erupt.
With over 24,000 people infected and 490 dead, the virus raises fears of a pandemic that would have harmful impacts on China’s economy in particular, and on the world as a whole, as a result of the country’s size and relevance in global trade.
Morgan Stanley analysts anticipate that the impact on global growth will come from China’s slowing Gross Domestic Product (GDP).
The most evident consequences of a more closed China with less economic activity are the reduction in the volume of foreign trade conducted with the country, and a sharp retraction in tourism. It is worth noting that seven percent of all international tourist flow comes from China to other countries or from travelers to China.
For UBS analysts Edward Teather and William Deng, China’s GDP is expected to grow by 5.4 percent in 2020, down from the six percent previously projected.
“China’s domestic demand, particularly consumption, is expected to be affected, and this should impact global trends around the rest of the world through a slowdown in Chinese imports,” analysts Chetan Ahya, Derrick Kam, Nora Wassermann, and Frank Zhao of Morgan Stanley note.
The supply chain would also be affected, since the production of Chinese companies is halted. The country’s major industries and companies are banned from resuming activities until February 10th.
In this scenario, economists also look at the impact on Brazilian activity, which is still slowly recovering. Several banks this week revised the projection for the national economy taking into account the effects of the disease, since the Asian giant is Brazil’s main trading partner and also has great influence on commodity prices.
As a result, Swiss bank UBS has reduced its estimate for Brazilian GDP growth from 2.5 to 2.1 percent in 2020. BNP Paribas, on the other hand, although it does not exactly revise the estimates for the economy, pointed out that there is a “downward trend” so the two percent growth as previously projected will not occur.
They believe that the agricultural and agribusiness sectors may be more affected by the direct channel, through commodity prices, thereby impacting the sector’s margin as a whole.
On Wednesday, the Bank of America lowered its projection from 2.4 to 2.2 percent for the year, taking into account Brazil’s activity data, which show “mixed signals” (as was the case of industrial production below the expected December), in addition to China’s deceleration.
In turn, Pantheon Macroeconomics, a macroeconomic consultancy, cut the forecast for this year’s GDP from 2.2 to 2.1 percent, looking mainly at data from the national economy, pointing out that the effect of the coronavirus on the Brazilian economy still lacks data.
“The virus could affect GDP growth in the first quarter, but February indicators will be required to determine a clear scenario,” pointed out Pantheon’s senior economist for the International Area, Andres Abadia, to Bloomberg.
Silvio Campos Neto, economist of Tendências Consultancy, said that the most obvious effect for the Brazilian economy will be the first quarter trade balance, which will suffer from the drop in commodity prices. However, Campos Neto does not believe in direct impact on the 2020 GDP, and sees more localized and concentrated impacts in the first quarter.
The economist points out that mining should be the most affected sector, while oil & gas and agribusiness would suffer more limited losses. “The coronavirus will not change consumption habits or the need to provide food in China,” he said.
“We haven’t incorporated any changes in activity yet. We need to assess the magnitude and length of this outbreak. If it continues, the potential for a revision in the GDP projections is greater,” he explains. Tendências expects the Brazilian GDP to grow 2.1 percent this year.
The Western Asset analysis team praises the level of diligence with which China has been handling the case and the speed of the measures taken.
“Although we recognize the gravity and speed of the current outbreak, we understand that the Chinese government’s swift responses to contain the situation are encouraging,” the analysts argue.