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Alarm over the coronavirus continues to spread as cases skyrocket in Far East Asia, Iran and Italy, creating an economic contagion that may prove difficult to contain as well.
To dampen panic, the International Monetary Fund’s managing director Kristalina Georgieva said at the recent Global Women’s Forum in Dubai that her economic crystal ball was being clouded by the coronavirus, but that she was still hoping for a “V shaped” recovery from China — a pronounced drop followed by a quick return to growth. At the G20 summit in Riyadh just a week later, she struck a tone that was clearly less optimistic.
Prior to the coronavirus, China was pegged to grow 6 percent, its slowest pace in nearly three decades.
Phase 1 of the US-China trade agreement lifted a cloud of uncertainty over protectionism, but that 18-month dispute seems like a blip on the screen today based on a sky-high level of uncertainty. Georgieva said China could slow to 5.6 percent, which is already forcing is Asian neighbors from South Korea to Southeast Asia to act.
The Philippines cut interest rates, Singapore announced a $4.5 billion emergency financial package, South Korea described the situation as an emergency that will need funding and the ZEW economic institute in Germany said virus fears are undermining sentiment and that was before Italy was gripped by a sharp rise of infections.
One should not overlook that it was Asia, not the US, that’s been the real engine of global growth the last two decades. The gross domestic product growth of China speaks wonders about the interconnectedness of today’s economy. Back during the sars virus in 2003, China was a $1.6 trillion economy. In 2020, it is a $14 trillion giant that vacuumed up products from all of Asia. That is clearly under threat, as oil, coal, copper and other commodities remain under pressure. But the coronavirus in an era of globalization poses a much bigger threat to global supply chains — where one manufacturing hub, say in South Korea or Japan, is highly dependent on supplies from China.
There is no shortage of analysis on how this is already affecting technology, pharmaceutical and aerospace companies, but at the G20 meeting the first bout of protectionist realism bubbled to the surface. France’s finance minister Bruno Le Maire went so far as to suggest that the West has become too dependent on China and its low-cost, highly productive manufacturers. It is not national pride or protectionism, claimed Le Maire, but industrial logic that needs to be applied to future policy.
I remember covering the final GATT trade agreement under the Uruguay round in 1988 before the creation of the World Trade Organization. It was France that posed the biggest challenge to a successful trade deal due to fears of US cultural colonialism from Hollywood and the threat to Europe’s highly subsidized farming sector. Neither proved true, but the language itself does not bode well for a global rules based system.
The coronavirus in an era of globalization poses a much bigger threat to global supply chains — where one manufacturing hub, say in South Korea or Japan, is highly dependent on supplies from China.
John Defterios
But it was Japan that signaled the clear and present danger of the coronavirus to the health of global commerce. China and Japan continue to have strained political relations, but the second and third largest economies are glued together as never before. Japan’s finance minister Taro Aso said it would be a mistake to remain complacent and those who have fiscal space to support growth should do so. Germany immediately comes to mind with its trade surplus and growing dependency on exports to China and the rest of Asia. Japan has its own issues to contend with after the economy collapsed in the fourth quarter by more than 6 percent and with the coronavirus in the mix, a recession seems inevitable.
This emergency policy call to action may give new life to what has been a dormant institutional structure at the G20. The group now represents more than 80 percent of GDP, with a quarter of the group from Asia. During the global financial crisis over a decade ago, then British Prime Minister Gordon Brown revamped the G20 to put forth a coordinated stimulus package that was the right move at the right time to resuscitate growth.
We heard murmurings of the same at the G20 in Riyadh with Saudi Arabia holding the rotating president this year.
“We will enhance global risk monitoring, including of the recent outbreak of COVID-19. We stand ready to take further action to address these risks,” according to the final communique of the conference.
Host finance minister Mohammed Al-Jaadan of the Kingdom said countries are ready to pull the policy trigger if needed.
“We all agreed that all countries and states will be ready to intervene as needed to face these risks and it’ll be a multilateral intervention including the WHO (World Health Organization) to monitor these risks and use relevant policies as needed,” said Al-Jadaan.
Despite that outlook, the G20 said that global economic growth is expected to pick up “modestly” this year and next. At this stage of the coronavirus threat, I would not bank on it.
• John Defterios is CNN Business emerging markets editor and anchor based in Abu Dhabi. Twitter: @JDefteriosCNN