Federal Reserve Chairman Jerome Powell said the outbreak of the coronavirus will likely hit the Chinese economy and could spill wider, but it was too early to judge what impact it would have on the U.S.
“We are very carefully monitoring the situation,” Powell told a press conference Wednesday in Washington after the U.S. central bank held its benchmark interest rate steady. “There will clearly be implications at least in the near term for Chinese output.”
The outbreak of the SARS-like coronavirus in China has rattled financial markets as investors assess how much it will hurt the country’s economy and whether that will weigh on U.S. and global growth. Equity and oil prices have swung sharply in recent days.
“There are some signs that global growth may be stabilizing,” including some of the diminished tensions around trade, Powell told reporters. “Nonetheless, uncertainties about the outlook remain,” he said, noting that these include the coronavirus, though it was very uncertain how far it would spread.
Back in 2003, SARS hit the Chinese economy hard, slowing growth with the downturn most noticeable in the services sector. But wider fallout was limited because the country’s weight in global growth at that time was a modest 4%, compared with the 17% of global GDP today, potentially boosting harmful spillovers if its economy stumbles.
The lesson of SARS is that disease outbreaks can have a marked negative impact on China’s growth, said Bloomberg chief economist Tom Orlik. “If that happens again, China’s larger role in the global economy would significantly increase spillovers,” he said. “The other lesson of SARS: a panicked reaction in the early stages of the outbreak can overstate the risks.”
The coronavirus’s rapid spread has spurred buying of safe assets. Last week, the futures market saw one interest-rate cut by year-end and traders increased their bets this week that would happen.
The economic impact of coronavirus will depend on the severity and duration of the outbreak and if fatal infections spread to major western economies, including the U.S. Investors are therefore monitoring the effectiveness of measures to contain the virus that has claimed more than 100 lives.
Chinese authorities have limited travel to try to prevent contagion. Hong Kong has banned visits from mainland China and foreign companies have shut Chinese locations and taking other steps to safeguard employees.
The U.S. Centers for Disease Control and Prevention advised travelers to avoid all non-essential trips to China. The agency, which is spearheading the U.S. effort to contain the virus, said that while the risk to the American public is considered low, the precautions are necessary to stop its spread.
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