- Amid the coronavirus outbreak in China, less demand from the world's second-largest economy, interruptions to travel and tourism, disruption in supply chains, and lower commodity prices are clouding the global outlook and leading to both business caution and potential overall weakness in U.S. growth.
- If the coronavirus remains largely contained in China, we expect it will not significantly affect the U.S. economy, with damage concentrated in the first quarter. First-quarter growth will now likely be closer to 1% (was 2.2% previously) because of the impact of the coronavirus and the suspension of Boeing 737 MAX production and exports.
- Along with the potentially devastating human toll, if the virus spreads further and lasts longer, the impact on virtually every economy could be far worse. We will be watching the numbers on the health of the U.S. economy, determining whether, and by how much, the coronavirus infects investment demand and consumer spending.
The death toll from the new coronavirus continues to rise, as do the fears of it spreading more widely beyond Wuhan, China. According to the World Health Organization (WHO), the virus has led to more than 40,000 confirmed infections globally (more than 99% of which are in China) and over 910 deaths as of Feb. 10, compared with 774 in the SARS outbreak.
While the case fatality rate (the proportion of those infected who subsequently die) for the virus appears to be lower than for SARS, it spreads more rapidly than the earlier disease. Over the weekend, deaths from coronavirus surpassed those from severe acute respiratory syndrome (SARS). On Feb. 9, the WHO warned that a few cases of the virus that have been spread by people who never travelled to China could be "the tip of the iceberg."
The humanitarian impact of the virus cannot be overstated, but, at this point, S&P Global's U.S. economists expect the effect on the U.S. economy to be modest given its limited exposure to the virus so far. Unless the virus spreads much more widely, we estimate a 0.1 percentage point (ppt)-0.2 ppt. drag on our December baseline forecast of 1.9% growth for 2020 (see "Fewer Signs Of Scrooge-ing Up U.S. Growth In The New Year," Dec. 4, 2019).
Based on an analysis of recent public information available on the virus, S&P Global's Asia-Pacific economists have revised their baseline forecast for China. They now estimate that the outbreak will lower China's 2020 GDP growth by 0.7 ppt. to 5.0%, with most of the impact in the first quarter and a recovery firmly in place by the third quarter. They are also forecasting that China's GDP will make up lost ground in 2021, coming in above trend at 6.4%. (Prior to the outbreak, they forecasted growth of 5.6%.)
However, they recognize that the path of the outbreak is very uncertain. If the virus is not contained, which is a material risk, the economic impact--and the credit implications--could be much more severe (see "Coronavirus To Inflict A Large, Temporary Blow To China’s Economy," Feb. 6, 2020).
Given that China drives one-third of global growth and is closely integrated into global supply chains (now even more so than at the time of the SARS outbreak in 2003), an economic shock in China will affect virtually every economy. The key question: By how much?
The Net Drag On U.S. Growth
While economic fallout on China from the virus will matter to the U.S. economy, at this point, we expect most of the drag on U.S. growth to be in the first quarter, with a smaller hit in the second quarter and a rebound in the latter half. Seasonally adjusted annualized first-quarter growth will now likely be closer to 1%, compared with the 2.2% we forecasted previously. Interruptions to travel and tourism, weaker demand from China, lower commodity prices, disruptions to supply chains, and added business caution over the global outlook will likely explain much of the overall weakness to U.S. growth. However, this assessment depends on the path of the virus and its longevity, which is highly uncertain.
The revision to our first-quarter forecast was not entirely due to issues related to the coronavirus. We attribute 50 basis points of the first-quarter drop to the suspension of Boeing 737 MAX production and exports, with further weakness in the second. It is anyone's guess when the jet will receive a greenlight from the regulators to fly; S&P Global's assumption for now is that production and delivery will resume in July at the earliest. For the year, the lost productivity from Boeing in the first and second quarters will likely add further drag to our baseline growth forecast.
The U.S.'s largely (about 85%) domestically driven economy helps limit the economic impact. Moreover, so far the spread of the virus in the U.S. has been limited, with only 12 reported cases as of Feb. 6. To put that in perspective, the Centers for Disease Control and Prevention estimates that from Oct. 1, 2019, through Jan. 25, 2020, there were 19 million-26 million flu cases in the U.S., with 180,000-310,000 hospitalizations and 10,000-18,000 deaths.
That said, the fears across the globe are understandable for a number of reasons. Never seen before, the new coronavirus is an unknown. Moreover, based on news reports, it mimics common upper respiratory diseases early on, seemingly spreads easily from person to person, and most cases seem to be severe.
How The Coronavirus May Affect The U.S. Economy
We believe the drag on U.S. growth will stem from five main channels.
Less tourism from China
The temporary suspension of flights between the U.S. and China and the lockdown of Chinese cities will lead to deferred vacations. According to the U.S. Office of Travel and Tourism, Chinese tourism to the U.S. fell about 50% during the SARS outbreak in 2003. A similar fall in 2020--from the estimated 2.9 million visitors in 2019--would decrease revenues by $9.7 billion when excluding students. (The average Chinese visitor spent $11,000 in 2018. Excluding students, the average Chinese visitor spent $6,700.) But the net impact would be less severe because some of them would rebook later; we assume about half will, which would put the hit from this channel at a little under $5 billion.
We expect that the effect on the tourism and hotel industries will likely be limited outside of cancellations in the near term. It will temporarily exacerbate the declining trend in Chinese visitors, but we expect that this should rebound to the pre-virus trend. The number of Chinese tourists had already peaked in recent years after a decade of strong growth, with the number of entrants stabilizing (even declining) since 2016 (see chart 1). Their increased purchasing power (per capita inflation adjusted gross national income up 12.6% since 2016) has offset the impact on tourism revenues from loss of growth in number terms.
Reduced consumer and capital goods imports by China
China accounted for nearly 7% of total U.S. exports in 2018, but this was only 0.6% of U.S. GDP (see chart 2). Given the outbreak is concentrated in one region, the slowdown in Chinese purchases will also likely remain largely in that region. (Although, contagion fear may keep people from spending in other regions and lead to people avoiding public spaces, with reports of empty shops as far away as Beijing.) As a result, the overall impact on imports is expected to be more modest than if the virus fanned out across the country. Moreover, the subsequent rebound in economic activity expected in the second half of the year will offset these losses, so the net impact should be small.
Supply-chain disruptions due to shortages of Chinese-produced intermediate goods
China's role in the global supply chain is critical. According to the U.S. International Trade Commission, it's the second-largest (10%) supplier of intermediate goods to the U.S. (Canada is the largest at 18%.) Intermediate goods account for about 40% of the $2.5 trillion in U.S. imports. This translates to $100 billion of Chinese intermediate goods exposure.
U.S. manufacturers that produce computers and electronics, electrical equipment, wood and paper products, and transportation equipment will be hit the hardest in terms of both severity and duration. (Prior to the outbreak, the Institute for Supply Management Manufacturing Index was just above 50, indicating expansion, after contracting for five straight months. We attribute the increase to signing of the U.S.-China Phase 1 trade deal.)
According to a Panjiva research report from Feb. 8, 2020, the coronavirus continued to devastate supply chains as Chinese factories remain closed. It noted that companies have started to count the costs across a diverse array of firms, highlighting the costs to either direct supplies or downstream supply chains. This moved downstream. Indeed, the shipping industry--including container lines, forwarders, and car carriers--has also begun to see a drop in business and has reduced capacity.
Lower commodity prices
The sharp deterioration in Chinese economic growth as a result of the virus also has repercussions for overall demand for commodities and commodity prices, with implications for commodity exports to the region.
Since the discovery of the new coronavirus has devastated China and shuttered its economy, the world has experienced plummeting commodity prices, dampening growth prospects across the globe. With markets expecting demand from the world's largest consumer of commodities to weaken, metals, energy, and agriculture prices have fallen dramatically (see chart 3).
After only recently getting some reprieve with the Phase 1 agreement between the U.S. and China, the deadly coronavirus is increasing fears that China may not be able to buy all the $32 billion agricultural goods it promised for 2020. Already weakened by the trade war with China, fears that the coronavirus will reduce Chinese demand for soybeans have pushed prices lower, hitting an eight-month low on Jan. 28, according to S&P Global Platts.
The energy industry may also face challenges from the likely reduced demand from China. This will matter to the U.S. given that the Energy Information Administration said in December that the U.S. will be a net exporter of petroleum and other liquids on an annual basis starting in 2020--the first time on record--as U.S. crude oil production continues to increase and domestic consumption of petroleum products decreases.
The impact of a sharp reduction in Chinese demand for oil depends on a country's exposure. The U.S. was the 10th leading supplier of crude to China, providing $6.8 billion in crude petroleum exports to China in 2018 (2.8% of China crude imports), according to worldstopexports.com (Jan. 29, 2020). While this is small relative to the supply of crude from the Middle East, with nine Middle East nations reportedly accounting for 44% of Chinese imported crude in 2018, the impact of the coronavirus on the price of crude oil will also weigh on revenues from other sources.
Reduced oil demand from China has lowered oil prices, which have fallen for the fifth straight week through Feb. 7 as the fallout from the virus has reduced demand for the world's largest importer of oil. The Organization of the Petroleum Exporting Countries (OPEC) and its allies have been considering possible reductions in crude output to help stabilize prices. But, it remains unclear whether they will reach an agreement on the depth of OPEC's production cuts. Indeed, oil prices fell to near $50 on Feb. 9 as coronavirus weighs on demand without OPEC action.
Financial market and business confidence
The effects from a decrease in business confidence and financial markets' reactions are hard to estimate. The current market backdrop is quite different from that of the 2003 SARS outbreak. SARS hit when global stock markets were in a trough following the burst of the dot-com bubble. In contrast, current markets are at historically high valuation levels, and so the potential for a significant market correction is much greater.
American investors' direct exposure to Chinese markets has grown, but unlike Chinese investors' exposure to U.S. markets, it remains very small overall.
A Question Of Timing
The big question is whether the coronavirus will be short-lived, or has only just started on its path of destruction. We will be watching public information on the outbreak to measure how this will end.
We will also be watching the numbers on the health of the U.S. economy, determining whether, and by how much, the coronavirus infects investment demand and consumer spending.
In the near term, we'll look at U.S. sentiment readings to determine whether business and consumer confidence take a dip, as well as U.S. household spending and travel decisions to see whether the virus has begun to significantly influence household decisions.
Over the longer term, we will be watching how possible weakness in sentiment readings play into business investment decisions this year. The U.S. has already suffered almost one year of declines in business investment activity, will the coronavirus mean the U.S. economy sees another?
- Coronavirus To Inflict A Large, Temporary Blow To China’s Economy, Feb. 6, 2020
- Boeing Co. Costs Up For 737 MAX Airline Compensation, Production Disruption; Ratings Remain On Watch Negative, Jan. 29, 2020
- Fewer Signs Of Scrooge-ing Up U.S. Growth In The New Year, Dec. 4, 2019
This report does not constitute a rating action.
The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.
|U.S. Chief Economist:||Beth Ann Bovino, New York (1) 212-438-1652;|
|U.S. Senior Economist:||Satyam Panday, New York + 1 (212) 438 6009;|
|Research Contributor:||Debabrata Das, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: email@example.com.