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Can China’s Economy Withstand the Coronavirus?

The COVID-19 epidemic’s tail risks are significant and frightening, but as of now, they do not seem particularly likely to materialize. Instead, the outbreak’s economic consequences will probably be substantial but transitory.

MILAN – The new coronavirus, COVID-19, that emerged in Wuhan, China in December has already killed thousands, altered the daily lives of hundreds of millions, and put the entire world on edge. Because epidemiologists have not yet fully discerned the virus’ transmission mechanisms, no one can say for sure when the outbreak might be contained, let alone what its economic fallout will be.

This does not mean, however, that no educated guesses can be made. Historical experience with similar large shocks suggests that the short-run economic damage may be considerable. As investors de-risk their portfolios, market volatility should be expected, especially in sectors deemed to have the largest exposures, such as travel and tourism, luxury goods, and autos.

A number of credible estimates (some public and some private) suggest that China’s annual GDP growth could fall by 2-4 percentage points per quarter until the virus peaks. In particular, consumption and output will take a hit, not least because of mobility restrictions, both voluntary and enforced. The bump that the Lunar New Year holiday usually provides is already lost.

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