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Economic Update: Greater China

ICAEW Economic Update: Greater China is a quarterly economic forecast for the finance profession, produced by Oxford Economics.

Short-term regional outlook challenged by coronavirus outbreak 

Published 17 February 2020

  • We forecast regional GDP growth at 5.2% in 2020, after an estimated 6.0% in 2019.
  • We expect the coronavirus outbreak to drag on China’s Q1 growth, followed by a rebound in Q2 and Q3. But a more serious and long-lasting impact can’t be ruled out.
  • The epidemic will also take a heavy toll on Hong Kong’s economy which has already been under severe pressure from the ongoing civil unrest.
  • The heavily tourism-dependent Macao economy will be battered by the ripple effect of the virus outbreak.

GDP growth in Greater China region

Signs that global growth may stabilise in early 2020 have calmed fears that the current slowdown will morph into a full-blown recession. But the key headwind in the short term will be the economic effects of the coronavirus outbreak. We estimate that it could knock around 0.25ppt off global GDP growth in 2020.

Global trade growth remained sluggish in the latter stages of last year and survey indicators point to further weakness in the near term. The phase one US-China trade deal has reduced the risk of a further imminent trade escalation but is unlikely to be a catalyst for a major acceleration in global trade growth.

China: Coronavirus outbreak weighs heavily on short-term outlook

Following a slowdown in 2018 and much of 2019, GDP growth stabilised at 6% y/y in Q4, the same rate as in Q3. Momentum in industrial value added, exports and investment improved in Q4, while consumption growth slowed. Overall, 2019 GDP grew 6.1%, after 6.7% in 2018. There are also signs that the inventory reduction during 2019 has run its course, which could support industrial growth this year. However, just as signs that recent growth stabilisation and the US-China phase one deal could put growth on a firmer footing, the near-term economic outlook is now overshadowed by the coronavirus outbreak.

The coronavirus outbreak now looks set to hit the Chinese economy in Q1 this year. The economic impact of the outbreak is likely to be high but short-lived, similar to the 2003 SARS episode. But the scale of the outbreak and impact is set to be worse than in the case of SARS, as the coronavirus is hitting a larger part of China and its population. 

The timing of the outbreak was inopportune: Chinese New Year, increased transport and economic connectivity, reduced work weeks and lockdown of affected regions all add to the equation. We expect the economic impact to mainly be felt in Q1, followed by a rebound in subsequent quarters. Private consumption growth is clearly under pressure in the near term as citizens stay home more than usual to avoid infection. Fixed investment and industrial production will also be hit as the flows of people and goods will likely be disrupted in the near term. That said, we expect policymakers to take some measures to support growth and facilitate an economic recovery, as they have a mandate for easier macro policy, if needed. 

We now look for GDP to grow 5.4% in 2020, compared with 6% forecast previously. But a more serious and long-lasting impact cannot be ruled out due to possible changes in the virus’s behaviour, larger impact of government travel restrictions, business closures and the fact that China has a much more connected economy nowadays.

China: Key cyclical indicators

Meanwhile, slow global trade will continue to challenge China’s external outlook. Goods exports expanded by 3% y/y in Q4, in real terms, up from 1% in Q3. But monthly data suggest that the sequential pickup in December was modest.

While the US-China phase one trade deal isn’t a game changer, we think that it will have a favourable impact on exports and domestic sentiment and confidence in China. The risk of relations deteriorating again and tariffs ‘snapping back’ is substantial against a background of tension and mistrust between the two countries in various dimensions. But the fact that, in this climate, a deal was reached is clearly a positive.

China's exports to key markets

Hong Kong and Macao outlook

Hong Kong’s economy has been suffering from the double whammy of US-China trade tensions and local political unrest in 2019. Just as the US-China phase one trade deal should by itself bring some positive sentiment at the start of this year, the economy is now overshadowed by the coronavirus outbreak. We forecast GDP to shrink 2.8% in 2020 after contracting 1.2% in 2019.

Macao's economy suffered from sluggish performance in the gaming industry in 2019 amid a slowdown in the Chinese economy, US-China trade tensions and political unrest in Hong Kong. We expect the coronavirus outbreak to further weigh on growth this year. We forecast GDP to fall 4.3% in 2019, follow by a 4.5% contraction in 2020.

Economic Insight reports are produced with ICAEW's partner Oxford Economics, one of the world’s foremost advisory firms. Their analytical tools provide unparalleled ability to forecast economic trends.