First, let’s get the official Chinese response out of the way: no, there is no risk of China entering a recession because of the novel coronavirus.
The standard line from the Chinese government is that they will overcome the situation. And, while there might be some economic bruising, they claim that everything is fine.
Just like everything was fine back in December, when the doctor who was warning colleagues about a new strain of SARS-like virus, got arrested for alarming the public.
So take the official position with a grain of salt. Understand, though, that official economic measurements are likely to reflect public policy objectives.
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The thing that is most riling up the markets around coronavirus isn’t so much the epidemic itself. It’s that there are important gaps in information that would help us understand what’s going on and what to expect in the future.
The markets really don’t like uncertainty. And the lack of transparency from Chinese officials is likely to continue to spook investors.
So far, independent analysts have projected that the effect of the virus on the Chinese economy will be a loss of around one percentage point of GDP. For an economy the size of China’s, that’s a major impact.
But, if we go by the official growth rate of last year, which came in at 6.0%, the implication would be that in 2020, China would grow by around 5.0%. That’s far from a technical recession, let alone a full-blown recession.
However, that doesn’t mean it isn’t enough to tip the world into some kind of financial problem.
Let’s Take Apart a Couple of Things:
1. Technical Recession
Just two quarters of negative growth would count as a recession. But that wouldn’t include Q4. So, in order for there to be a technical recession, we’d have to have the next six months of negative growth.
This would imply that the virus would have to afflict most of the country for an extended period of time.
2. Official Numbers
There are lots of analysts who question the official numbers, saying that Chinese growth is inflated. Some say that China grows around 1-2% in reality. So, the effects of a viral outbreak could lead to a recession.
But there isn’t any consensus on what “nonofficial” economic figures are.
3. It’s a Coronavirus
Coronaviruses are not new. In fact, you likely were infected with one at least once last year. They are one of the major causes of the common cold. Usually, people who are immunocompromised are at an increased risk.
This one appears to have a higher mortality rate. But, without any trust in the official number of infections, projecting the mortality rate has been challenging. China’s initial response of suppressing reports on infections might have grossly exaggerated the lethality of the virus.
Small Moves Can Have Big Repercussions
The world has gotten used to steady growth from China. Even if the country doesn’t fall into recession, just slowing down can have a domino effect across the world.
As the largest consumer of raw materials, slower growth would imply a drop in demand (as has already been seen.) And, it would significantly lower commodities prices. This would be enough to put many other countries, which already suffering from substandard growth, over the line into recession.
Worrying about a potential Chinese recession might be one step too far ahead. Australia, Mexico, Brazil, Chile, Russia, and New Zealand among others are likely to enter a recession before China does. At least officially.