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Published in Economic Development

Fears over prolonged coronavirus outbreak cool national economic outlooks

BY Friday, February 14, 2020 07:00am

The U.S. economy maintained moderate growth to start 2020, although the coronavirus crisis in China could cause problems.

The outbreak will affect Chinese economic growth and economies in other Asian nations, and potentially become a drag on the U.S., where the manufacturing sector is already in a downward trend and manufacturing supply chains are getting disrupted, according to economists.

The Chinese outbreak has the potential to become what economists refer to as a “negative external shock” or “black swan” event that disrupts the U.S. economy, said Paul Isely, associate dean of Grand Valley State University’s Seidman College of Business.

“The question is does it start to put enough of a screw on the economy to widen that uncertainty,” he told MiBiz. “It has the potential to kick us from a very sectoral recession to something a little deeper. We’re not there yet. You’d have to see the same level of activity going on for another month before we start worrying about those types of depths.”

For comparison, Isely notes that the ripple effects from the 2003 SARS virus outbreak in China reduced Chinese GDP that year by one percentage point and the U.S. GDP by a little less than 0.2 percent. China’s economy is now four times larger than 17 years ago and the coronavirus has already surpassed the magnitude of disruption from SARS, Isely said.

Many economic reports right now generally predict the outbreak will shave 0.2 to 0.4 percent off of global growth this year and a “little less” for the U.S., he said.

The outbreak in China occurs amid slowing economic growth in the U.S. and with a manufacturing sector that’s already contracting, Isely said. If the outbreak that’s been ongoing for a month continues into the spring or spreads around the world, the effects on the U.S. economy from supply chain disruption will widen, he added.

Other economic reports also cite the coronavirus as being a possible major concern for 2020. 

“We assume that the quarantines and fear in China will have a significant negative impact on China’s gross domestic product in 2020,” Comerica Inc. economists wrote in an updated U.S. outlook issued this week. In it, they noted the outbreak, which they assume will last six months, is “very difficult to quantify in terms of economic impact.”

According to the outlook: “The economic drag from the coronavirus outbreak reverses our previous assumption that China had turned the corner after weaker growth and signs of mild economic stress through early- to mid-2019. Certainly, there are U.S. companies that are already feeling the drag from reduced demand in China, reduced production in China, and reduced travel and tourism globally. However, the U.S economy as a whole is somewhat insulated from drag from the coronavirus outbreak, as long as the epidemic remains mostly confined to Asia.”

As MiBiz reported this week, the coronavirus already has been affecting West Michigan-based manufacturers, particularly auto suppliers that source components from China.

In his monthly report on the West Michigan economy that’s based on surveys with industrial purchasing managers, economist Brian Long, the director of supply management research at GVSU’s Seidman College of Business, noted that the U.S. Centers for Disease Control and Prevention report that a vaccine for the virus is a year to 14 months away.

“So, world travel and other measures to contain the spread may put a dent in the Chinese economy as well as other economies around the world, including our own,” Long wrote.

Long told MiBiz the manufacturing supply chain shutting down remains the biggest economic worry from the crisis.

“Our biggest problem is logistics, more than anything,” Long said. “That can be the biggest issue.”

Some U.S. economists have lowered their outlooks for the Chinese economy. For instance, PNC Bank reduced Chinese GDP growth expectations from 5.9 percent in its prior forecast to 5.2 percent for the first quarter.

“If the coronavirus outbreak is contained by the second quarter, Chinese economic growth will likely make a V-shaped recovery over the remainder of 2020,” PNC economists wrote in a Feb. 3 report on their downgrade.

In a report this week to Congress, Federal Reserve Chairman Jerome Powell also noted that “we are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.”

The Federal Reserve presently forecasts 2 percent U.S. Real GDP growth for 2020, down from 2.2 percent last year. 

Comerica projects 1.8 percent Real GDP growth for all of 2020 with growth picking up during the year to a quarterly rate of 2.3 percent for the fourth quarter.

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