Coronavirus Is 'Threatening the Future of Globalization,' Economist Says

Coronavirus could also spread economic contagion from China over the long term, an economist has warned, as experts assess the financial fallout from the illness that has killed at least 1,700 people and sickened 70,000.

The extended shutdown in China over the Lunar New Year due to the illness has already hurt the country's economy significantly as factories closed and workers remained at home.

China's first-quarter growth forecast has been slashed to three per cent—a three-percentage drop from the fourth quarter last year—and the largest quarterly drop in real GDP growth since the Tiananmen Square massacre in 1989, according to the investment bank, Nomura, cited by the Financial Times on Monday.

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Chinese children wear protective masks as they wait to board trains at Beijing Railway station before the annual Spring Festival on January 21, 2020 in Beijing, China. Economists are warning of a severe financial impact to the epidemic. Kevin Frayer/Getty Images

Chief economist from research company Capital Economics, Neil Shearing, warned that there are signs the economic disruption to China was spreading to other countries.

Pointing to the biggest slump in Chinese exports to South Korea since the Asia financial crisis in 1999, Shearing said that a prolonged shutdown might mean that lost output in China would never be recovered.

Factory closures in China mean a shortage of component parts which would cause companies to reassess large and complex supply chains.

"More will inevitably follow if the closures in China continue. It's difficult to judge how the economic effects of the virus will play out over the next ten days, let alone the next ten years.

"But it's possible that, to policy and technology, we may soon have to add the threat of global pandemics…to the list of factors threatening the future of globalisation," he wrote in an op-ed on Capital Economics' website.

In comments to Newsweek, Shearing added that firms will question the benefits of maintaining supply chains on their current scale.

"Maintaining supply chains eats up a lot of firms' working capital. The economics made sense in a world of free trade and without alternative technologies.

"But a shift towards more greater trade barriers, coupled with new technologies that allow firms to reshore some aspects of production, may mean firms start to shorten supply chains.

"The risk of disruption posed by pandemics or natural disasters would add to the reasons to make this shift. That would all point to production becoming more localised or, perhaps more likely, regionalised," he told Newsweek.

China's central bank announced plans to inject 1.2 trillion yuan ($173 billion) in the markets, to stabilize asset prices. It is also planning targeted tax cuts and an increase of government spending, China's Communist Party magazine Qiushi reported, cited by CNBC.

In comments to Newsweek, senior analyst at investment broker EXANTE, Matthew Hinman, said that investors in China are at a "crossroads" over what to do next.

"China's rhetoric remains committed to doing whatever is needed but that still may not be enough," he said. "Monetary policy makers around the world will not be able to prevent shocks to the system that coronavirus…could cause to world growth."

Earlier this month, Alicia Garcia-Herrero, chief economist for Asia-Pacific at investment bank Natixis, told Newsweek that the coronavirus would hurt China's economy more than SARS did in 2003, due to the growth of its economy over the last 17 years and its shift towards the service sector, away from a reliance on manufacturing.

The Statista graphic below shows the locations of confirmed cases of coronavirus.

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An infographic showing where cases of COVID-19 have been confirmed across the world. Getty
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