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The Economic Impact of the Coronavirus Extends Beyond China

The Economic Impact of the Coronavirus Extends Beyond China
Mykhailo Polenok/Dreamstime

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Monday, 27 January 2020 01:08 PM Current | Bio | Archive

“Risk” markets have weakened on news reports regarding the spread of the coronavirus.

China is extending the official Lunar New Year holiday by three days as part of a containment strategy. The total number of confirmed cases in China rose about 30 percent from the previous day to 2,744, with about half in the central province of Hubei, whose capital is Wuhan. Some experts suspect the number of infected people is much higher, according to Reuters.

That will also have some implications beyond China. Chinese production is part of a global supply chain. The recent increased role of China in global manufacturing means that the increased importance of the Lunar New Year holiday in recent years to global manufacturing may already have caused problems with “seasonal adjustments” to U.S. and European data. An extended Lunar New Year holiday affecting Chinese production of components may add to that problem.

At this stage, the impact should be limited. The extension of a holiday is short term and global firms do of course hold inventory. Some supply chains have also adapted to the U.S. trade tariffs, but, with around a quarter of global manufacturing coming from China, enforced closures of Chinese manufacturing should not be ignored.

For the domestic economy in China, the extension of the Lunar New Year holiday may add to online consumer spending. However, public entertainment, amusement parks, cinemas, etc., and travel will be negatively affected.

The significance of the coronavirus on Chinese economic activity depends less on the virus itself and more on how people behave in response. This is why the role of social media may become more important. Rumors always play a role in events like this. The difference with past instances is that now there is a mechanism which excels at spreading fake news.

In the meantime, the trial of President Donald Trump continues in the U.S. Senate this week. There were weekend reports of a book of the former National Security Advisor John Bolton, titled “The Room Where It Happened: A White House Memoir,” that hasn’t been published yet but has increased calls for witness testimony at the trial.

Financial markets are still likely to remain indifferent to the case. Conviction seems to remain a low probability and a President Mike Pence would probably not offer much change in policy.

Trade secretary Wilbur Ross has been offering a distraction to the trial with threats of yet more trade conflict with the European Union. When speaking to the Financial Times, Ross compared the EU’s plans for a carbon tax to moves by several European countries to impose a digital services tax, which has angered U.S. officials and caused Washington to threaten tariffs on EU products.

Ross said, “Depending on what form the carbon tax takes, we will react to it — but if it is in its essence protectionist, like the digital taxes, we will react.”

Yes, the so-called “peace” brokered with France over the delayed collection of the digital tax didn’t last a week.

This time, the threat is focused on plans for a European carbon tax. The idea is that imports manufactured with carbon-intensive energy would be taxed on the “embedded” carbon. The tax would probably be a bigger issue for China than for the United States, at least potentially given China’s dependence on coal for electricity generation.

Besides all that, on Sunday in regional elections in the Italian northern region of Emilia-Romagna, Italy's right-wing League leader Matteo Salvini failed to overturn decades of leftist rule. This is seen as reducing the chances of an early general election, and avoiding an early general election is considered as positive for Italian asset prices.

By the way, Emilia-Romagna is one of Italy’s wealthiest regions, which is home to the Ferrari sports cars and Parmesan cheese and has, interestingly, been an impregnable leftist stronghold for generations, Reuters reports.

At the moment, and because of the coronavirus issue, I’d prefer to lower my exposure to “risk” assets until we’ll get more clarity on the situation, which could take some time.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.
 

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"Risk" markets have weakened on news reports regarding the spread of the coronavirus. China is extending the official Lunar New Year holiday by three days as part of a containment strategy. The total number of confirmed cases in China rose about 30 percent from the previous...
china, coronavirus, economy, EU, trade
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2020-08-27
Monday, 27 January 2020 01:08 PM
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