Moody's lowers Apac growth forecast to 5.2% over Coronavirus outbreak

Moody's on Tuesday lowered growth forecast for the Asia-Pacific (Apac) region to 5.2 per cent for 2020 citing the lingering impact of the coronavirus outbreak in China, the impact of which will be more pronounced on China and India.

The coronavirus that emerged in China early January has killed over 1,860 people and infected more than 72,000 so far and there is no end in sight yet. The epidemic has forced China to shutter over a dozen of its teeming cities, locking up over 60 million people and closing down tens of thousands of factories, impacting the global supply chain.

The impact of the shuttering is large as China contributes a whopping 16 per cent of global GDP, up from 4 per cent when it was hit by the SARS virus in 2003 and consumes over a fifth of metals globally besides controlling over 40 per cent of the global apparel and textile trade.

As of now, from the supply side, the electronics market is the worst hit as the Hubei province, the fountainhead of the epidemic outbreak, is known as the 'Optics Valley' of the world. There will be an impact on automobile and drugs, among other key sectors.

Lowering the 2020 growth forecast for the Asia-Pacific region to 5.2 per cent, except developed economies in the region that are collectively projected to clip at a low 0.8 per cent, Moody's Investor Service said, "Economic growth will slow across Asia-Pacific as the coronavirus weakens demand and disrupts supply chains. But, the impact will be more pronounced in the first quarter."

It attributed this to the falling growth in China, which is projected to grow at 5.2 per cent, and India, which is projected to clip at 5.4 per cent for 2020 down from its earlier projection of 6.6 per cent.

Lower Chinese import demand is the primary reason for the slowing growth and intra-regional trade amplifies the impact of lower growth in China, it added.

The report said impact of the outbreak on overall growth will be felt primarily through trade and tourism, and for some sectors through supply-chain disruptions. This shock is on the back of a marked slowdown in 2019 as decelerating global trade has hit the region already, it added.

"Our baseline assumption is that economic effects of the coronavirus outbreak will continue for a number of weeks before tailing off and allowing normal economic activity to resume," according the report.

Accordingly, "we have lowered China growth forecast to 5.2 per cent for 2020 from 5.8 per cent previously, reflecting a severe but short-lived economic impact, with knock-on effects for economies across the region," it said.

Specifically, Moody's expects Macao and Hong Kong will face the biggest hit, given their close economic integration with China.

The overall lower forecast also incorporates downward projections for India due to the outbreak, coupled with the already weaker domestic demand in India, apart from the hit on the Thai economy.

Reduced Chinese demand for Asian exports and supply-chain disruptions represent the two most direct transmission channels for slowing growth, although services trade adding a third channel. This is because goods and commodity exporters are the most exposed to a protracted fall in Chinese demand, while tourism hubs that rely on Chinese visitors will also be vulnerable.

Growth impact will be more pronounced in the first quarter as its baseline assumption is that the economic effects of the coronavirus outbreak will continue for a number of weeks before they tail off and normal economic activity resumes.

However, prolonged outbreak will cause significant second-round effects, including severe supply-chain disruption.