The coronavirus could cost China’s economy $60 billion this quarter. Beijing will have to act fast to avert a bigger hit

China may have to cut taxes, boost spending and slash interest rates to prevent the coronavirus outbreak wreaking havoc on an already fragile economy.

The economic impact of the virus is still impossible to determine, but one state media outlet and some economists have said that China’s growth rate could drop two percentage points this quarter because of the outbreak, which has brought large parts of the country to a standstill. A decline on that scale could mean $62 billion in lost growth.

China can ill afford that kind of hit. Growth last year was already the country’s weakest in nearly three decades, as China contended with rising debt and the fallout from its trade war with the United States.

BEIJING, CHINA - JANUARY 26: A Chinese man wears a protective mask, goggles and coat as he stands in a nearly empty street during the Chinese New Year holiday on January 26, 2020 in Beijing, China. The number of cases of a deadly new coronavirus rose to over 2000 in mainland China Sunday as health officials locked down the city of Wuhan earlier in the week in an effort to contain the spread of the pneumonia-like disease. Medical experts have confirmed the virus can be passed from human to human. In an unprecedented move, Chinese authorities put travel restrictions on the city, which is the epicenter of the virus, and neighboring municipalities affecting tens of millions of people. The number of those who have died from the virus in China climbed to at least 56 on Sunday, and cases have been reported in other countries including the United States, Canada, Australia, France, Thailand, Japan, Taiwan and South Korea. (Photo by Kevin Frayer/Getty Images)

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The coronavirus, which first appeared in the central city of Wuhan, has already killed more than 200 people and infected more people than the SARS outbreak in 2003. A disease of this magnitude wasn’t even on China’s radar. Before the outbreak, the government was more worried that social unrest could be its “black swan” problem — an improbable but chaotic event officials feared could be spurred by rising unemployment.

Now Beijing is scrambling to stop the virus from cratering its economy. The ruling Communist Party recently put Premier Li Keqiang in charge of virus control. The decision was a clear signal that stopping the virus is “the priority among priorities” for the government right now, the official People’s Daily newspaper wrote in a recent commentary.

So far, policymakers have taken some steps to help the businesses that are most affected by the rapid spread of the disease.

Central and local governments have allocated $12.6 billion so far to spend on medical treatment and equipment.

Major banks have cut interest rates for small businesses and individuals in the worst-hit areas. And the Bank of China said it would allow people in Wuhan and the rest of Hubei province to delay their loan payments for several months if they lose their source of income because of the disruption.

The People’s Bank of China, the country’s central bank, has said that it will ensure there is enough liquidity in the financial markets when they reopen next Monday after a 10-day Lunar New Year holiday. When Hong Kong’s markets reopened earlier this week, the Hang Seng index (HSI) plunged nearly 6% in just a few days of trading.

A Chinese man wears a protective mask as he rides an escalator at a large empty shopping area that would usually be busy during the Chinese New Year and Spring Festival holiday on January 28, 2020 in Beijing, China.

Aggressive action

The government will likely have to be even more aggressive in the coming months to avert a more serious slowdown, according to Chinese economist Zhang Ming.

Zhang, who works at the Chinese Academy of Social Sciences, wrote this week that he expects economic growth to slump by a percentage point to 5% in the first quarter, assuming the epidemic lasts until the end of March. He described that as his most optimistic scenario, but didn’t give a specific forecast should the outbreak last even longer.

Job seekers crowd to the annual job fair on April 13, 2018 in Zhengzhou, Henan Province of China.

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The government could cut taxes and boost spending on public healthcare and employment training, Zhang said. He also expects local governments to spend more on infrastructure. By boosting economic activity and creating jobs, he added, cities can offset any weakness in private investment in real estate and manufacturing.

The central bank is also likely to deliver more interest rate cuts to stabilize the economy, Zhang said. Altogether, he said such measures could help growth rebound next quarter and push annual GDP growth to around 5.7%. While that’s lower than last year’s 6.1% growth, it would be in line with many analyst expectations.

Others take a more pessimistic view.

Analysts at Nomura believe growth could drop by two percentage points or more in the first quarter. The Global Times, a state-run tabloid, wrote Friday that the outbreak could shave two percentage points off GDP growth this quarter, citing industry insiders. Government’s efforts to contain the virus by extending Lunar New Year holidays and forcing factories to shut down could “take a piece out of the nation’s manufacturing industry and disrupt the global supply chain.”

Measuring the fallout

It’s too early to say whether that level of upheaval is on the horizon. Tesla (TSLA) has been forced to close its new Shanghai-built factory temporarily. And Apple (AAPL) has lost production from suppliers in Wuhan. The longer term impact on both companies is much less clear.

A customer looks at the 10th anniversary iPhone X in an Apple store in Hong Kong on November 3, 2017. (Photo credit should read ANTHONY WALLACE/AFP via Getty Images)

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Other sectors might have more to lose right now. Tourism — a multibillion-dollar industry during the Lunar New Year — has been decimated as the government quarantines major population centers and people avoid traveling for fear of becoming infected. Major travel companies, hotels and airlines have offered refunds through most of February, while some airlines have suspended services to and from China.

Holiday celebrations have been canceled and major tourism spots have been closed off. China’s massive box office will also likely take a hit after several blockbuster movies set to release during the holiday season were pulled.

Zhang and other analysts suggested that the fallout could even be more serious than after SARS, the respiratory disease that caused China’s economic growth to briefly plunge before rebounding nearly two decades ago.

The spread of the coronavirus threatens to cause job losses and push consumer prices higher, compounding economic woes that already exist.

The employment market is already under stress this year. Industries that traditionally create a lot of jobs, like the technology sector, have been hurt by the economic slowdown. The coronavirus outbreak will make things worse, according to Zhang.

China’s 290 million migrant workers are among those most exposed to a slump. Many of them travel from rural areas to the cities to take on construction and manufacturing jobs or perform low paying but vital work, such as waiting tables in restaurants, delivering packages or acting as janitors.

But because many factories and businesses remain shut down, millions of those workers might find it hard to land a job after the extended Lunar New Year holiday ends. More than 10 million migrant workers from Hubei province alone might also face discrimination from employers fearful that they may spread the virus.

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Zhang warned that China’s unemployment rate — already a concern for officials — could reach a record high in the coming months. The rate traditionally has hovered around 4% or 5%.

He added the virus could also make consumer goods more expensive. Budgets are already tight because of rising debt, and a pork crisis brought on by the outbreak of African swine fever among China’s pigs last year has caused the price of meat to skyrocket. Now vegetable prices have risen as people rush to buy basic necessities during the virus outbreak, according to the state news agency Xinhua.

Other challenges

Dealing with the disease will make some of China’s other problems that much tougher to solve — including its tricky trade relationship with the United States.

As part of a truce reached earlier in January, Beijing agreed to buy $200 billion worth of US products in the next two years. Analysts have already said that shrinking domestic demand in China will make it tough for the country to hit those targets. If the virus weakens the country’s buying power even more, those goals could move even further out of reach.

SHENZHEN, CHINA -SEPTEMBER 25: Workers make pods for the e-cigarette company Mystlabs on the production line at First Union, one of China's leading manufacturers of vaping products, on September 25, 2019 in Shenzhen, China. Global production for e-cigarette and vaping products is centered in a five-square-mile district of Shenzhen, China, which is the focal point for roughly 90% of the industrys supply chain. Hundreds of companies in China ranging from large corporations to smaller workshops -- are vying for a part of the international market for e-cigarette and vaping products industry worth an estimated $15 billion USD. With investigations by U.S. health officials into an outbreak of vaping-related illnesses across more than 30 states, there are new concerns about product safety, health effects, and addiction among young people. Chinas government is drafting new standards for manufacturing, safety, and quality control. The regulations are likely months away from taking full effect, though most established e-cigarette manufacturers in China already employ strict quality controls that comply with U.S. and European standards. Still, a growing number of U.S. states, including New York and New Jersey, are moving to ban certain vaping products and electronic smoking devices. Many of the firms are seeking to make inroads into the potentially lucrative Chinese market, where reports say more than 60 percent of adult males smoke. (Photo by Kevin Frayer/Getty Images)

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Substantial tariffs totaling hundreds of billions of dollars also remain in place on many Chinese goods. And Washington has made it clear that those will remain a form of leverage as the two sides negotiate the next phase of their agreement.

Even so, at least one analyst finds it unlikely that the trade war will escalate just because China is “temporarily” unable to honor its trade commitments. The United States is in an election year, and such an action could jeopardize President Donald Trump’s campaign, said Ken Cheung, chief Asian foreign exchange strategist at Mizuho Bank.