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Three reasons coronavirus won’t derail China’s economy – MarketWatch

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Project Syndicate

By Shang-Jin Wei

Published: Jan 27, 2020 4:57 pm ET

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Investors are overreacting to the Wuhan epidemic

Pedestrians wearing face masks cross a road in Hong Kong on Monday.

NEW YORK (Project Syndicate) — The panic generated by the new coronavirus, 2019-nCov, which originated in Wuhan, one of China’s largest cities and a major domestic transport hub, reminds many of the fear and uncertainty at the peak of the 2003 SARS crisis.

China’s stock market

HK:HSI+0.15%


CN:SHCOMP-2.75%

 , after rising for months, has reversed itself in recent days, and global markets have followed suit,

DJIA-1.57%


GDOW-1.82%

 apparently reflecting concerns about the epidemic’s impact on the Chinese economy and global growth. Are these worries justified?

Opinion: The main reason for the stock market’s decline is NOT the coronavirus

My baseline projection is that the coronavirus outbreak will get worse before it gets better, with infections and deaths possibly peaking in the second or third week of February. But I expect that both the Chinese authorities and the World Health Organization will declare the epidemic to be under control by early April.

Small impact

Under this baseline scenario, my best estimate is that the virus will have only a limited negative economic impact. Its effect on the Chinese growth rate in 2020 is likely to be small, perhaps a decline on the order of 0.1 percentage point of gross domestic product.

The effect in the first quarter of 2020 will be big, perhaps lowering growth by one percentage point on an annualized basis, but this will be substantially offset by above-trend growth during the rest of the year. The impact on world GDP growth will be even smaller.

Such a prediction recalls the experience of the 2003 SARS crisis: a big decline in China’s GDP growth in the second quarter of that year was then largely offset by higher growth in the subsequent two quarters. While the full-year growth rate in 2003 was about 10%, many investment banks’ economists over-predicted the epidemic’s negative impact on growth.

Looking at annual real GDP growth rates from 2000 to 2006, it is very hard to see a SARS effect in the data.

Some fear that the epidemic’s timing — at the start of the week-long Chinese New Year celebration, and in the middle of traditional school-break travels — will exacerbate the economic fallout by keeping many people away from shops, restaurants, and travel hubs.

Three factors

But three important factors may limit the virus’s impact.

First, in contrast to the SARS outbreak, China is now in the internet commerce age, with consumers increasingly doing their shopping online. Much of the reduction in offline sales owing to the virus will likely be offset by an increase in online purchases.

And most of the vacations canceled today will probably be replaced by future trips, because better-off households have already set aside a holiday travel budget.

Many factories have scheduled production stoppages during the Chinese New Year holidays anyway, so the timing of the epidemic may minimize the need for further shutdowns. Similarly, many government offices and schools had planned holiday closures independently of the virus outbreak.

The government has just announced an extension of the holiday period, but many companies will find ways to make up the lost time later in the year. The short-term negative impact is thus likely to be concentrated among restaurants, hotels, and airlines.

Second, all reports indicate that the Wuhan coronavirus is less deadly than SARS (although it may have a faster rate of transmission initially). Equally important, the Chinese authorities have been much swifter than they were during the SARS episode in moving from controlling information to controlling the spread of the virus.

By implementing aggressive measures to isolate actual and potential patients from the rest of the population, the authorities have improved their chances of containing the epidemic much sooner. That, in turn, increases the likelihood that the lost economic output this quarter will be offset by increased activity in the remainder of the year.

Third, whether or not China’s trade negotiators realized the severity of the Wuhan virus when they signed the “phase one” trade deal with the United States on Jan. 15, the timing of the agreement has turned out to be fortunate.

By greatly increasing its imports of facemasks and medical supplies from the U.S. (and elsewhere), China can simultaneously tackle the health crisis and fulfill its promise under the deal to import more goods.

Global growth

The virus’s impact on other economies will be even more limited.

During the last half-decade, many major central banks have developed models to gauge the impact of a slowdown in China on their economies. These models were not built with the current health crisis in mind, but they do take into account trade and financial linkages between China and their respective economies.

As a rule of thumb, the negative impact of a decrease in China’s GDP growth on the U.S. and European economies is about one-fifth as large in percentage terms.

For example, if the current coronavirus epidemic lowers China’s growth rate by 0.1 percentage point, then growth in the U.S. and Europe is likely to slow by about 0.02 percentage point. The impact on Australia’s economy may be twice as large, given its stronger commodity-trade and tourism links with China, but a 0.04-percentage-point reduction in growth is still small.

Such calculations assume that the coronavirus does not spread widely to these countries and cause direct havoc. This currently seems unlikely, given the low number of cases outside China.

Of course, the impact on China and other economies could be more severe if the coronavirus crisis were to last much longer than this baseline scenario assumes.

In that case, it is important to remember that Chinese policy makers still have room for both monetary and fiscal expansion: the banking-sector reserve ratio is relatively high, and the share of public-sector debt to GDP is still manageable compared to China’s international peers. By using this policy space when necessary, China’s authorities could limit the ultimate impact of the current health crisis.

The coronavirus outbreak is understandably causing alarm in China and elsewhere. But from an economic perspective, it is too early to panic.

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Surprise Growth Makes South Africa’s Economy Bigger Than Before Pandemic Struck – BNN Bloomberg

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(Bloomberg) — South Africa’s economy is bigger than before the coronavirus pandemic struck, after growing faster-than-expected in the third quarter on increased farm output.

Gross domestic product expanded 1.6% in the three months through September, compared with a contraction of 0.7% in the previous quarter, Statistics South Africa said Tuesday in a report released in the capital, Pretoria. The median of 12 economists’ estimates in a Bloomberg survey was for growth of 0.4%. The economy grew 4.1% from a year earlier.

Full-year growth may also surprise on the upside. The central bank forecasts an expansion of 1.8% and the National Treasury 1.9%. For the nine months through September, an early indicator of where full-year growth may land, GDP grew by 2.3% from last year.

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The 2.3% expansion in the first three quarters is a “reasonable indicator” of the annual number, said Joe de Beer, deputy director-general of economic statistics at the agency. “I can’t see it differing by more than” half a percentage point “from just a mathematics point of view,” he said.

“After taking into account the firmer-than-expected third-quarter figure, we expect growth to average closer to 2.5% in 2022, before slowing to just above 1% next year,” said Sanisha Packirisamy, an economist at Momentum Investments.

At an annualized 4.6 trillion rand ($265 billion) in the third quarter, GDP is about 53 billion rand bigger than the fourth quarter of 2019, before the pandemic struck. A contraction in the prior three months had reversed gains made in the first quarter that made it bigger.

The quarterly expansion comes even after Africa’s most-industrialized economy experienced record power cuts because state electricity utility Eskom Holdings SOC Ltd. couldn’t keep pace with demand from its old and poorly maintained plants. Industries behind the better-than-expected growth were agriculture and transport, which grew 19.2% and 3.7% quarter-on-quarter respectively.

Strong exports of mineral, vegetable and paper products also contributed.

Still, South Africa’s economy remains stuck in its longest downward phase since World War II and hasn’t grown by more than 5% annually in 15 years. The government’s National Development Plan, a 2012 economic blueprint co-authored by President Cyril Ramaphosa, says that level of expansion is needed for sustainable job creation in a nation where almost a third of the workforce is unemployed.

Slow structural reforms, political uncertainty and high levels of crime continue to weigh on fixed-investment spending in South Africa, with private companies wary of committing large sums of money to domestic projects. Gross fixed capital formation climbed 0.3% from the previous quarter.

Household spending, which comprises about two-thirds of GDP, declined 0.3% in the third quarter. It’s likely to come under further strain from high inflation and interest rates that are at a level last seen more than five years ago.

Weak growth is forecast for the final quarter because of continued rolling blackouts and a strike over wages that took place at Transnet SOC Ltd., South Africa’s state-owned logistics company that operates most of the harbors in the nation, in October. The central bank forecasts expansion of 0.1% this quarter.

Lackluster economic growth and mounting price pressures pose a threat to social stability in one of the world’s most unequal societies and may stymie efforts to reduce fiscal deficits and debt.

–With assistance from Simbarashe Gumbo and Rene Vollgraaff.

(Updates with economist comment in paragraph five. An earlier version corrected household spending figure in paragraph 11)

©2022 Bloomberg L.P.

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World Economy Heads for One of Its Worst Years in Three Decades – BNN Bloomberg

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(Bloomberg) — The world economy is facing one of its worst years in the three decades as the energy shocks unleashed by the war in Ukraine continue to reverberate, according to Bloomberg Economics.

In a new analysis, economist Scott Johnson forecasts growth of just 2.4% in 2023. That’s down from an estimated 3.2% this year and the lowest — excluding the crisis years of 2009 and 2020 — since 1993.

However, the headline figure is likely to mask diverging fortunes, with the euro area starting 2023 in recession and the US ending the year in one. By contrast, China is projected to expand more than 5%, boosted by a faster-than-expected end to its zero-tolerance Covid strategy and support for its crisis-hit property market.  

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Differences will also be on display when it comes to monetary policy after a year in which central banks “dashed toward restrictive territory in a pack,” Johnson wrote.

“In the US, with wage gains set to keep inflation above target, we think the Fed is headed toward a terminal rate of 5%, and will stay there till 1Q24. In the euro area, meanwhile, a more rapid decline in inflation will mean a lower terminal rate and the possibility of cuts at the end of 2023.”

In China, where authorities are torn between a desire to support the recovery and concern about the weakness of the currency, “limited” rate cuts are on the cards.

Read more: Global Growth Set to Slow From 3.2% in 2022 to 2.4% in 2023

©2022 Bloomberg L.P.

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Securing good jobs, clean air, and a strong economy – Prime Minister of Canada

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Autoworkers have been a keystone of the Canadian economy for generations. By investing in the future of the auto industry, we are not only securing good middle-class jobs, we are fighting climate change, and building an economy that works for generations to come. 

Since January alone, Canada has secured several historic manufacturing deals for electric vehicles (EVs), hybrids, and batteries – deals that will create and secure thousands of good, middle-class jobs and provide the world with clean vehicles. Today, we are seeing the results of one of those deals start to roll off the line.

The Prime Minister, Justin Trudeau, was joined today by Premier of Ontario, Doug Ford, to open Canada’s first full-scale EV manufacturing plant, General Motors of Canada Company’s (GM) CAMI assembly plant in Ingersoll, Ontario. Starting today and going forward, the plant will build fully electric delivery vans – the BrightDrop Zevo 600 – which will help cut pollution and keep our communities healthy for our children and grandchildren.

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Thanks in part to a $259 million investment from the Government of Canada, GM’s CAMI assembly plant was able to retool its operations to build these electric vans. By 2025, the plant plans to manufacture 50,000 EVs per year. This investment has helped secure thousands of well-paying, high-quality jobs across GM facilities, and is helping advance the electrification of Canada’s automotive sector.

The Government of Canada will continue to work to attract investment from companies around the world as we build our EV supply chain – from mining critical minerals to manufacturing batteries, and vehicles. By taking action today, we are positioning Canada as a global leader in EVs, fighting climate change, securing good jobs, and building an economy that works for all Canadians – now and into the future.

Quotes

“When we invested in GM’s project to build Canada’s first full-scale electric vehicle manufacturing plant in Ingersoll, we knew it would deliver results. Today, as the first BrightDrop van rolls off the line, that’s exactly what we’re seeing. This plant has secured good jobs for workers, it is positioning Canada as a leader on EVs, and will help cut pollution. Good jobs, clean air, and a strong economy – together, that’s the future we can build.”

The Rt. Hon. Justin Trudeau, Prime Minister of Canada

“Today is proof that our historic investments in EV manufacturing are paying off. With the first BrightDrop vans coming off the assembly line, we’re seeing the skill of Canadian workers making a huge difference as the world moves to EVs. Our government, in partnership with GM, is cementing Canada’s leadership in the EV supply chain.”

The Hon. François-Philippe Champagne, Minister of Innovation, Science and Industry

“This milestone represents GM at our best – fast, flexible and first in the industry. The BrightDrop Zevo is a prime example of GM’s flexible Ultium EV architecture, which is allowing us to quickly launch a full range of electric vehicles for our customers. And, as of today, I am proud to call the CAMI EV Assembly team the first full-scale all-electric manufacturing team in Canada.”

Mark Reuss, President, General Motors

“This is a very exciting moment – a revolution in the way we transport people and goods. Today marks a huge day for BrightDrop, as we expand our footprint and begin producing the Zevo electric vans at scale, and a huge milestone for Canada on the road to a brighter future. Opening the CAMI plant is a major step in providing EVs at scale and delivering real results to the world’s biggest brands, like DHL Express, who will be our first Canadian customer.”

Travis Katz, President and CEO, BrightDrop

Quick Facts

  • The Government of Canada’s $259 million investment supports GM’s more than $2 billion project to reignite production at its Oshawa assembly plant, after operations stopped in 2019, and transform its CAMI assembly plant in Ingersoll.
  • The investment is being made through both the Strategic Innovation Fund and its Net Zero Accelerator Initiative.
  • The Government of Ontario made a matching contribution of up to $259 million toward the project.
  • Founded in 1918, General Motors of Canada Company (GM) is one of the largest automotive manufacturers worldwide. It is headquartered in Oshawa, Ontario, and is one of Canada’s largest automotive manufacturers.
  • GM is planning to introduce 30 new electric vehicles by 2025, eliminate tailpipe emissions from new light-duty vehicles by 2035, and become carbon neutral in its global products and operations by 2040.
  • The automotive sector contributes $16 billion to Canada’s gross domestic product and is one of the country’s largest export industries.
  • The automotive sector supports the employment of nearly 500,000 Canadians.
  • The 2030 Emissions Reductions Plan, released in March, puts Canada on track to achieving our goal of cutting emissions by 40 to 45 per cent below 2005 levels by 2030 while continuing to build a strong economy.
  • To make zero-emission vehicles more affordable and accessible, the Government of Canada offers incentives of up to $5,000 off the purchase or lease of a light-duty zero-emission vehicle through the Incentives for Zero-Emission Vehicles (iZEV) Program. Since May 2019, close to 176,000 Canadians have taken advantage of this program.
  • Since 2015, the Government of Canada has invested $400 million in building approximately 35,000 zero-emission vehicle charging stations across the country.

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