The outbreak of corona virus in China, although in its ascending phase, may threaten global recovery, especially considering that the 2003 severe acute respiratory syndrome (SARS) outbreak cost the world $57 billion (at current price level), says a research note from State Bank of India (SBI).
In the report, Dr Soumya Kanti Ghosh, group chief economic adviser of SBI, says, "The new virus is of same genre as SARS virus of 2003. Although the fatality is low, the new virus has progressed at a much faster pace than 2003 SARS case. The impact of outbreak on China will be severe as Wuhan is the hub of transport and industry for central China. The total cost of SARS outbreak in 2003 at current prices is around $57 billion. Epidemiology models suggest the current disease is in ascending phase hence it is difficult to assess the full impact at this stage."
The pneumonia of unknown cause was first reported in WHO Disease outbreak news on 5 January 2020. By 12th January, the outbreak was confirmed. The new virus is of the same genre as SARS virus of 2003.
The studies on economic impact of SARS virus of 2003 suggest that the outbreak had impacted industries such as tourism and the retail service sector. "With sudden shift in expenditure priority growth will be affected in China and globally," SBI says.
In addition, the report says, unless the impact of novel corona virus is factored in, since the events were coterminous, the analysis of the US and China deal and its impact on global economy would be incomplete.
On 15 January 2020, the US and China signed the first economic and trade agreement by signalling the intent to end the economic and trade hostility that has marred the bilateral relationship for over two years. The trade agreement signed on 15th January is broadly divided into seven parts and covers a wide range of agreements and roadmaps on protection of intellectual property (IPR), transfer of technology on market-based principles and trade.
It is agreed that over 2017 baseline, China will import $200 billion of goods and financial services for the first two years. At the highest level, the agreement brings some clarity on US-China side of US-China-India triangle. For the global economy, the growth expectations improve but marginally. The upside is limited as trade disputes are just one of the many structural problems.
Commenting on the impact of the deal on US dollar and US interest rates, SBI says, "The deal envisages reducing the Sino-US trade deficit by 48% for its level in 2018 and hence one can expect that if the deal proceeds as planned US dollar will appreciate over time. The direction of interest rates will be conditional on three vectors - the US fiscal deficit, the progressive decline in forex reserve accretion of China and other factors such as inflation. Of late the interbank liquidity in the US was in deficit. Thus, all factors indicate marginal rise in bond yields in the US."
"However, on the other side, with global food prices at 71 month high and trend likely to continue central banks in emerging economies could make an unsynchronized exit from easy monetary policy. This could mean a weakening US dollar. In balance, we expect pressure on US dollar with risks tilted towards the downside as now," Dr Ghosh from SBI added.
For India, SBI says, the mood swing in financial markets on account of aggressive posturing by the either side will become less and thus, some order is expected in the global forex markets and Indian rupee will have an appreciating bias.