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Wednesday 19 February 2020

Economy threatened by coronavirus: SBI assessment

The impact of the coronavirus epidemic on China will be severe as critically affected Wuhan is the hub of transport and industry for central China

Soumya Kanti Ghosh, group chief economic adviser of SBI, in his latest assessment of the world economy has flagged the concern of the coronavirus affecting trade as the epidemic affects not only China on a wide scale but also reaches as far as Europe and North America. The comparative static of the Sino-US trade deal earlier this month, says the report, “will be incomplete unless the impact of novel coronavirus is factored into our analysis as events were coterminous.”

“On 15 January 2020,” the report reminds, “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 report continues: “The trade agreement signed on 15 January is broadly divided into seven parts.” It “covers a wide range of agreements and roadmaps on the protection of intellectual property (IPR), transfer of technology on market-based principles and trade…”

Over the 2017 baseline, the report says, 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,” says the report. Then comes the impact of the epidemic.

The new virus is of the same genre as the SARS virus of 2003. Although the fatality is low, the new virus has progressed at a much faster pace than SARS did, according to the SBI.

The impact of the coronavirus disease on China will be severe as critically affected Wuhan is the hub of transport and industry for central China. The total cost of the SARS outbreak in 2003 at current prices is around $ 57 billion. Epidemiology models suggest the current disease is in the ascending phase.

On the issue of the impact of the coronavirus epidemic on US dollar and US interest rates, the SBI report says the deal envisages reducing the Sino-American trade deficit by 48% for its level in 2018 and, hence, one can expect that if the deal proceeds as planned, the dollar will appreciate over time. The direction of interest rates will be conditional on three vectors:

  1. US fiscal deficit
  2. the progressive decline in foreign exchange reserve accretion of China and
  3. other factors such as inflation

Of late, the interbank liquidity in the US was in deficit. Thus, all factors indicate a marginal rise in bond yields in the US. However, on the other side, with global food prices at a 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,” the SBI report says.

For India, the mood swing in financial markets on account of aggressive posturing by either side will become less. Thus, some order is expected in the global forex markets and Indian rupee will have an appreciating bias.

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