Think tanks have been dropping China’s GDP growth as the coronavirus continues to spread throughout the world.
Citigroup, Economist Intelligence Unit, Nomura, Moody’s, and S&P all lowered their economic growth projections for China last week. Capital Nomura Securities in Thailand is now seeing 5.6 per cent for China this year, down from 5.7 per cent before the outbreak.
The securities firm’s prediction is based on the assumption that the outbreak is contained within the month. If the outbreak is not contained by June, the Chinese economy could only grow by 3.9 per cent this year, they noted.
S&P Global Ratings said the coronavirus outbreak is “hitting China’s people and economy hard,” as they predict that the mainland’s full year GDP growth will fall to 5 per cent, compared with 5.7 per cent before the outbreak.
“Most of the economic impact of the coronavirus will be felt in the first quarter, and China’s recovery will be firmly in place by the third quarter of this year,” said Shaun Roache, Chief Asia-Pacific Economist at S&P Global Ratings. Their baseline assumption is that the virus will be contained by March.
Its predicted range is between 5.5 and 4.4 per cent for the economy in 2020 and the growth rate would depend on when the outbreak will peak. In their baseline, they also assume that travel restrictions will gradually ease during the second quarter of the year. These restrictions directly affect economic activity in China, especially consumption.
“We expect the effect to be more drawn out than for SARS, given the longer time to reach peak infections and the more vigorous policy response, especially travel restrictions, in this episode,” said Roache. “Household consumption will take the main hit, especially spending on discretionary goods and services as individuals avoid public spaces to minimise the risk of infection.”
Loss and opportunity
Given that China’s economy accounts for one-third of global growth, a slowdown of 1 per cent on the mainland is likely to have a material effect on global growth, S&P said. This is true especially for countries that heavily depend on Chinese demand such as Thailand.
The ratings firm said the global impact will be felt through four real economic channels including sharply reduced tourism revenues, lower exports of consumer and capital goods, lower commodity prices, and industrial supply chain disruptions. The Tourism Authority of Thailand already estimated that the impact from the drop in Chinese tourists could amount to 50 billion baht, which would take away 0.31 per cent of nominal GDP.
Kasikorn Research Center (K-Research) said that around 900,000 Chinese visitors visited Thailand during the Lunar New Year season (January-February) in 2019, compared to 550,000 in the first month of this year. The lowered number of visitors is leading to a drop of 40-50 per cent in terms of airline passengers coming in from China in first quarter of 2020.
For the whole of 2020, the outbreak could contribute to a drop of 10 per cent in Chinese visitors when compared to last year, amounting to 1.1 million fewer visitors from China. This would also represent a drop of 2.2 million airline passengers coming from China to Thailand this year, which would definitely impact airlines since flights between China and Thailand account for around 30-40 per cent of the market value.
For passengers coming in from China, the outbreak could cost the industry 4.3-5.8 billion baht this year. The loss of Thai visitors to China would cost them another 300-400 million baht. The loss of visitors from Europe, East Asia (excluding China), the Americas, Australia, and New Zealand would cost airlines an additional 3.1-4.4 billion baht. Together, the accumulated loss of all passengers from major origin regions could cost Thai airlines around 8-11 billion baht this year, which would push the industry’s value down by 4.3-6.2 per cent to 2.94-3 trillion baht.
The research center also noted that the outbreak has resulted less demand for Thai products from China, as well as fewer materials coming in from the mainland. They said that if the outbreak is contained within one month from now, the impact on the Thai production chain will be minimal.
However, the impact on Thai exports, especially for consumer products, could be as much as US$400-$800 million. If the outbreak continues for another three months, the loss could be even more substantial at no less than US$1.5 billion and up to US$6 billion, depending on how many cities Beijing shuts down.
The impact on the export of consumer products would be around US$900 million to US$1.5 billion. At the same time, imports of electronic equipment, chemical products, and car parts for Chinese carmakers would also drop, which would lead to a loss of US$600 million to US$4.5 billion in terms of production.
But Thailand’s capacity utilisation rate (CAPU) in December reached 64 per cent, recovering from its new low of 63 per cent in October. The improvement in December actually resulted from the lower contraction in the manufacturing production index (MPI), Maybank Kim Eng Securities noted.
The securities firm has linked the improvement of Thailand’s CAPU primarily to the stockpiling of inventory in preparation for the Lunar New Year, which in turn drove the improvement in the MPI. The CAPU dropped to its lowest last year in October when the MPI registered a contraction of 8.1 per cent year-on-year. It improved marginally in November and December, giving the CAPU an average rate of 66.3 per cent in 2019 – its lowest in ten years. The MPI also contracted for the first time since 2010.
Still, Maybank Kim Eng Securities believe that both the CAPU and the MPI will improve this year as they expect the trend in December to continue into January, which would represent a sustained sequential improvement given that the inventory stocking for the long holiday season is already done.
They said that there could be a disruption in the improving trend of Thailand’s CAPU and MPI this month if economic activities in China remain constrained from the outbreak. The slowdown in China’s economic activities affects the flow of products and diminishes services, which could linger into March.
Given that there will be a search for alternative suppliers, the securities firm thinks Thailand can benefit from this because of its position as a high volume exporter of basic products, especially food, some basic industrial materials, and more importantly its sizable spare capacity to accommodate a sudden surge in demand.
With its strong relationship with China, Thailand could be picked as the recommended alternative supplier in instances where Beijing cannot fulfil its volume commitment, they added.
“We will have inventory restocking as soon as China gets out of its fight against the coronavirus,” Maybank’s analyst said.
“Considering how disrupted economic activities in China are, we anticipate a drawn down inventory position, especially of basics, from food to beverages, to packing and intermediate materials.”
“We should focus on this rather than the short-term negative impacts and look at how exporting countries can benefit. Thailand looks like a good option, especially since it has spare capacity that can accommodate a sudden surge in demand and is also friends with China,” he added.
The securities firm pointed towards cement and plastics manufacturer SCC as a “potential major beneficiary” from the view that Thailand could see a sizeable lift in the CAPU and the MPI, especially in basic goods exports, during the first quarter of 2020. Other shares that could benefit include rubber producer STA, cement producers such as SCCC and TPIPL, fresh/processed chicken producers such as CPF and GFPT, along with other food suppliers such as TWPC (tapioca) and KSL (sugar).