The World Health Organization has declared that the coronavirus outbreak is an international health emergency, as the death toll continues to mount in China. While it is too early to determine the global economic impact of the coronavirus outbreak, early signs suggest that many trading countries will experience a drag, particularly the economies in Asia which are tied closely to China.

The consensus of economists in terms of inputting this external shock into the global economic outlook is lagging a bit behind the actual spread of the virus.

China’s economy will experience the greatest immediate negative shock from the outbreak, though the economic trauma has spread around the world, particularly to industries that depend on consistent and uninterrupted product flows. The most obvious affected industries on the consumer side are tourism, travel and retail sales as travel into and out of China has been severely restricted because of the virus. But travel all over the world has also been affected by fears of contagion. On the industrial side, the government-mandated shutdowns of some factories in China is having repercussions on global supply chains. 

The coronavirus economic shock to China’s economy could reduce this year’s annual growth rate anywhere between 0.5 to 1.5 percentage points from the frequently estimated 6% growth projection that existed prior to the virus effect. For example, Oxford Economics has revised down its China GDP growth forecast for 2020 to 5.4% from an original 6%.

The virus, with its concentration in China, will have a much larger impact of the global economy than was the case with the 2003 SARS outbreak which was also centered in China. China’s economy is far more important to the world economy today, accounting for about 16% of global GDP compared to 4% in 2003.

Since the early 2000s' China has in effect became the world's factory, churning out a massive array of products and inputs into other country’s supply chains.

Thus China exports a vast array of products such as iPhones and imports huge quantities of agricultural and industrial commodities, including oil and copper. For example, international crude oil prices have already fallen about 20% from recent highs.

Epidemics such as this shouldn’t hurt the economies in the long run, but there is no doubt that there will be a short-term economic effect that will spread far beyond China.

China’s own economy has changed significantly over the past 17 years. For example, China’s economy currently depends more heavily on domestic demand and has somewhat shifted away from a reliance on manufacturing and exports, towards the service sector. This underscores why China’s own economy is more vulnerable today to a slump in domestic demand from the coronavirus than it would have been in the past. Ironically, the epidemic is a severe blow to the Chinese economy, especially following the recent boost it got after the signing of the phase one trade deal with the US. The People's Bank of China (PBOC) has already lowered short-term interest rates and pumped an extra 150 billion yuan ($22bn) into the economy to support the banking system. Surely more is to come.