Growth unlikely to plummet despite virus outbreak

Due to the novel coronavirus outbreak originating in Wuhan on the eve of Spring Festival, China's central government implemented strict quarantine measures and extended the Lunar New Year holiday. These policies have yielded concrete results in containing the virus.

Many people are deeply concerned about how this outbreak will affect the economy. Will the gross domestic product expand at a rate below 5 percent? To what extent will the economy be affected by the virus and measures to stem it in the first quarter? Will there be zero or even negative growth?

With the epidemic breaking out during the holiday, its impact on consumption was greater than on investment. According to data from the Ministry of Commerce, domestic retail and catering industries reported sales in excess of 1 trillion yuan during the Spring Festival Golden Week last year. Some forecasts say consumption during this year's Golden Week will take quite a beating.

Besides, losses incurred by catering and entertainment businesses during this period are irrecoverable. Sales of consumer goods in the first quarter are expected to drop by 50 to 70 percent, equivalent to a loss of 500 billion to 700 billion yuan.

Likewise, owing to the virus infection and quarantine measures, the number of travelers has tumbled. Figures released by the Ministry of Transport show that in the 10-day holiday break (January 24 to February 2), a total of 190 million trips by rail, land, ship and air were recorded, about 73 percent down from the same period last year. As of February 6, the number of travelers slumped 35 percent year on year during the 27 days from January 10 to February 6.

A study by a team led by analyst Ren Zeping of the Evergrande Research Institute shows that based on tourist revenue during last year's Spring Festival, the coronavirus outbreak is projected to wipe out more than 500 billion yuan, or roughly 2 percent of the gross domestic product in the first quarter of 2019.

The service sector looks set to rack up sizeable losses in the first quarter of this year. The study estimated that box office takings could shrink by 7 billion yuan. Retail and catering could see sales halved to 500 billion yuan, while a travel ban would likely cost the tourism industry 500 billion yuan in lost revenue. In total, direct economic losses sustained by these three sectors in the space of seven days would amount to 1 trillion yuan, which represents 4.6 percent of the 21.8 trillion yuan in gross domestic product in the first three months of 2019.

Therefore, the cyberspace is rife with speculation about negative growth in the first quarter. And pessimists are fixated on the question of how steep the decline will be. Will growth plunge by 5 percent or 10 percent?

My belief is that even if we take into account the severe blow the outbreak and resultant quarantine has dealt to the economy, growth is unlikely to be zero or even negative in the first quarter. Why?

We need to know what zero or negative growth implies. Unbeknownst to the average reader, gross domestic product is the sum of value added contributed by all sectors, rather than the sum of revenue or aggregate gross output value. That's why it's wrong to include revenue or output value losses in calculating a country's gross domestic product.

Take the tourism and catering industries for instance. Statistics available to me show that the domestic tourism industry in 2018 generated revenue of 5.97 trillion yuan, of which value added was 3.7 trillion yuan, or about 60 percent of revenue. Meanwhile, the catering industry produced an overall output value of 3.9 trillion yuan. The value added stood at 1.46 trillion yuan, accounting for only 35 percent of the whole industry's revenue.

Nationwide, the average value added rate across a full spectrum of industries will not exceed 30 percent, because for most manufacturing businesses, the ratio of their value added to gross output value hovers below 20 percent. The energy sector is an exception as its value added rate could reach 70 percent. Based on the assumption that the value added of all industries represents 30 percent of their revenue or output value, we can extrapolate that their aggregate revenue in the first quarter of 2019 totaled as much as 65 trillion yuan, triple the 21.8 trillion yuan in gross domestic product during the same period.

Based on recent growth trends, it's safe to predict that the Chinese economy, without being affected by external factors, will continue to expand at a nominal rate of no less than 8 percent every quarter. That means, absent the outbreak, China would be reporting a nominal gross domestic product of at least 23.54 trillion yuan in the first quarter, which translates into approximately 71 trillion yuan in revenue or output value. If the country were to experience zero or negative growth in the first quarter, nominal growth rate would plunge by 8 percentage points. A drop this steep would entail a reduction of 6 trillion yuan in revenue or gross output value in the first quarter.

So, is it possible for all sectors to hemorrhage 6 trillion yuan in nominal revenue amid the coronavirus outbreak? Given ongoing efforts to combat the virus and revive the economy, I think this scenario is out of the question. The estimated losses cited in a few reports cannot bear closer analysis and are likely to be exaggerated.

Therefore, we cannot simply add the revenue or losses incurred by catering, retail and tourism, because the numbers could be added many times over. The same risk of double counting also exists in other segments of the service industry.

No doubt the shockwaves triggered by the ongoing outbreak will be greater than the SARS epidemic in 2003. While the service industry has been buffeted in the short term, with disruptions also to manufacturing and the supply chain, the impact of the outbreak will be limited as long as it can be contained soon.

Some manufacturing businesses could not reopen due to the pandemic. Further compounding their misery is the withdrawal of orders, which definitely will hurt corporate bottom lines and investments. Although the extended holiday has forced some medium and small enterprises to delay operations by another week or so, they are expected to resume full-scale operation by the end of February thanks to supportive government policies and incentives. In general, manufacturing will sustain losses in the first quarter, but up to a point.

The outbreak has wide-ranging implications across a large array of areas, but the lingering effects are not meant to stay. The most probable scenario is that growth will plummet 30 to 50 percent in the first quarter. If the 6 percent real growth rate is referenced as a benchmark, this implies 2 to 3 percentage points pared off China's economic growth.

If the outbreak can be brought under control in the first quarter, coupled with a subsequent economic rebound in the second quarter, it will result in 0.5 to 0.75 percentage points shaved off China's growth.

Of course, while taking stock of the economic implications of the viral outbreak, we need to take into consideration the duration of the epidemic apart from the original forecast trend growth rate. As long as we put an end to the outbreak by the end of the first quarter, and with the economy bouncing back in the second quarter and through the remainder of the year, the negative effects of the first-quarter losses will be offset.

As far as the economic outlook is concerned, with the reopening of factories and replenishing of inventories, there is hope that the Chinese economy might be on track to a swift recovery. In all likelihood, we anticipate a V-shaped growth pattern, where economic activity moderates before dramatically perking up again. The impact of the coronavirus on the economy is relatively controllable.

(Zhang Jun is dean of Fudan University's School of Economics and director of China Center for Economic Studies at Fudan University. This article is adapted from a long-form commentary. Shanghai Daily reporter Ni Tao translated the article from Chinese.)