Will Coronavirus Impact Growth?

Tensions are escalating over the spread of China’s coronavirus outbreak and how it might dent economic growth. At this point, we simply don’t know the lasting impact, but there is likely to be at least a short-term effect, which could cause ripples that are worth monitoring.

The most obvious area of impact will be China, where some economists estimate that the virus will cause growth to drop below 5 percent in the first quarter. If so, the virus would accelerate a trend that was already in play: Chinese growth downshifted from 6.6 percent in 2018 to 6.1 percent in 2019, as the world’s second largest economy struggled with rising domestic debt and demand, and the effect of the trade war with the U.S.

If the virus were to persist beyond the first quarter of this year, its impact could spread to trading partners in Asia, Europe, South America and even to the U.S. Already companies across various industries, like financial services, car manufacturers and consumer goods are enforcing travel bans to China; some are temporarily shuttering manufacturing facilities and rerouting supply chains; and still more are closing retail stores in the affected areas.

In the press conference that followed the first monetary policy meeting of the year, Federal Reserve Chairman Jerome Powell said the central bank is “Very carefully monitoring the situation…there will clearly be implications at least in the near term for Chinese output.” Even without the virus, world growth was not expected to light it up in 2020. While there have been signs that manufacturing might be bottoming, the IMF projects global GDP to be at 3.3 percent and at 2 percent in the U.S.

That pace would come on the heels of an already-slowing economy: U.S. growth downshifted from 2.9 percent in 2018 to 2.3 percent in 2019. While many lamented that 2019 was the slowest pace in three years, it’s simply a return to the trend of about a 2.25 percent for the decade long expansion. As economist Joel Naroff noted, “there is no reason to think that will change significantly in one direction or the other.”

Despite overall gains in the labor market, consumer spending which is good, not great, and business investment which remains lackluster, it’s easy to see why the Fed described economic activity that is “rising at a moderate rate,” which is not exactly sizzling, but it’s also not the end of the good times either.

Bottom line: While the virus is certainly a cause for concern, the long-term economic impact is not yet discernible. That notion didn’t prevent a sell off of stocks on Friday, dragging down the main U.S. indexes by about two percent on the week. The Dow closed out its worst January since 2016.