- The outbreak of a novel coronavirus six weeks ago in the world’s second-largest economy and the unprecedented efforts taken to contain it will affect the global and European economies, and will have an adverse impact on businesses and consumers.
- The macroeconomic hit will be comparatively modest, but some sectors will be heavily affected. In Europe the automotive sector is particularly vulnerable to supply chain disruption, and a hit to industrial production is likely.
- Consumer spending will also be affected owing to the knock to European retail firms in China and because of the decline in Chinese tourists visiting Europe. This impact will be less severe, with Russia and the luxury goods sector being the most exposed.
- Our baseline forecast is that the public health emergency in China will be under control by end-March. Given this scenario, we have revised down growth in China by 0.5 percentage points and growth in Europe by 0.1 percentage points.
The unprecedented quarantine measures taken to halt the spread of a novel coronavirus originating in Wuhan, a city of 11.3m people in China’s central Hubei province, will adversely affect the global economy. Europe will not be the worst-hit region, but it will not escape unscathed. The effects are already starting to be felt in both business and consumer sectors, with supply chains coming under pressure in Europe in the automotive, electronics and other industrial sectors; and European airlines including British Airways, Air France, Iberian Airways and Lufthansa cancelling flights to and from China.
Our baseline scenario is that the public health emergency in China will be brought under control by end-March. This is based on the latest scientific studies and comparisons with a similar coronavirus outbreak (severe acute respiratory syndrome, or SARS) in 2002‑03. The Chinese slowdown will be concentrated in the first quarter of 2020, when we project that economic growth will slow to about 4% year on year, with a recovery in activity in the second half bringing full-year growth to 5.4% (revised down from 5.9%). However, as China is now far more integrated into the global economy than when SARS hit—and ten times larger in US dollar terms—the impact will be that much greater.
We have revised down our global growth forecast for 2020 from 2.3% to 2.2%, and our euro zone growth forecast from 1.3% to 1.2%, but we will keep these growth rates under close review, given continued uncertainty about the future development of the pathogen.
Which sectors are most at risk within China?
These downward revisions to our macroeconomic forecasts are comparatively modest. The impact on specific sectors, however, will be more severe.
The epicentre of the outbreak, Wuhan, is a major manufacturing centre focused on the automotive, electronics, steel and biopharmaceutical industries. French firms PSA and Renault are both present, with joint ventures with Dongfeng, one of the China’s “big four” state-run automakers. In the electronics sector, Apple relies on production centres run by Taiwanese firm Foxconn. Wuhan, which for the moment remains closed, is also a logistics hub for central China, and plays an important role in national and international supply chains, transporting goods between the country’s coast and its interior. We can therefore expect disruption to both production, owing to extended factory shutdowns, and supply chains, owing to transport suspensions and port closures.
What does this mean for the industrial sector in Europe?
The European automotive sector is highly exposed to supply chain disruptions from China. A number of car manufacturers, including Italian-American firm Fiat Chrysler, have stated that they are only weeks away from having to stop production at European car plants owing to difficulties sourcing components from Chinese suppliers. The problem is that it can take only one missing part to stop an entire assembly line if an alternative supplier cannot be sourced in time (carmakers are likely to be looking to Vietnam and Thailand, which have already benefited from supply chain diversification from the US-China trade war). Hyundai has already had to suspend production at its plant in South Korea, and there is a clear risk that several European automotive plants may have to pause production by end-February. This would have knock-on effects for parts suppliers in central Europe.
The effect of factory shutdowns in the automotive sector will be mitigated by the 8.2% year-on-year decline in new-car sales in China in 2019, meaning that most carmakers serving this market (or located there) have surplus stock, as well as surplus components at their plants. However, European new-car sales picked up sharply in the final quarter of 2019—with double-digit growth in Germany—so may run out of components earlier.
Supply chain disruptions will affect other industries as well as automotives. The Netherlands is most directly exposed, with 19% of its export earnings coming from China, but in reality this reflects its status as a trade hub for the region. Europe’s busiest seaport is Rotterdam in the Netherlands, and over 40% of the country’s imports are destined for re-export, according to the national statistics office. For example, disruptions to exports of smartphones from China to Europe will show up first in the Netherlands. The shipping industry has already seen the cancellations of 151,500 containers due to be shipped between Asia and Europe, according to a report by a Danish maritime data provider.
How will consumer spending be affected?
The retail and services sectors across China have already been hit as a result of the quarantine measures and public concerns about the virus. Swedish furniture retailer IKEA has closed half of its 30 stores in China and fashion retailer H&M has closed 97 of its 580 stores. The impact of weaker footfall on export earnings from these and other European consumer goods firms will probably be lessened by stronger online sales as consumers change their shopping patterns.
A more direct hit will come from fewer Chinese tourists visiting Europe this year. Russia is most exposed: 28% of total tourist visits to Russia in 2018 came from mainland China, and there has been particularly strong recent growth among elderly travellers, who are more at risk from the virus. Russia has closed most of its border crossings with China, and a decline in tourism spending is likely to weigh on the services balance this year as a consequence.
Tourist inflows to the EU from China have risen strongly in recent years—tripling over the past decade—and major destinations are already feeling their absence. That said, they remain a small share of the total, at 2.4% in France, the top destination (Italy, Germany and the UK are also popular). Chinese tourists typically spend less than Western tourists on accommodation and dining, but more on retail. The luxury goods sector is particularly exposed, with Chinese shoppers making up a third of the global market, according to Bain, a management consultancy. Luxury and designer outlet centres in the UK such as Bicester Village are likely to see earnings dampened in the first quarter and beyond.
What other issues could be important for Europe?
As an oil producer, Russia’s main concern is around oil prices. Crude oil prices have fallen by about US$10/barrel since mid-January, owing to fears about a fall in demand from China, which is the single largest source of new oil consumption. We expect oil prices to stay at about US$60-65/b, assuming that our baseline scenario comes to pass, which will have only a mild impact on the Russian economy. However, China is easily Russia’s largest trading partner, accounting for 12.5% of exports and 22% of imports in 2018, so in our view the trade channel is likely to prove more disruptive than the hit to oil prices. The sectors facing most disruption are those that depend on trucks and trains for transportation—notably timber, minerals and food products.
For the euro zone, the main concern is that the efforts to contain the coronavirus will delay the rebound in the industrial sector after its contraction in 2019. Forward-looking indicators had suggested that the downturn might be bottoming out at the end of the year, but more recent industrial production data, which show a 2.1% year-on-year fall in euro zone output in December, suggest that the sector is still vulnerable. With manufacturing sentiment now likely to waver again and the slowdown in China dampening global demand more broadly, we expect a further contraction in euro zone industrial output in the first quarter of 2020.