Coronavirus: five points on the hit to EM activity so far - Capital Economics
Emerging Markets Economics

Coronavirus: five points on the hit to EM activity so far

Emerging Markets Activity Monitor
Written by Edward Glossop
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This Activity Monitor outlines five key points on the coronavirus fallout for EMs, including what we can say about the impact so far. At the very least, it looks like the virus will cause aggregate EM GDP growth over this year as a whole to slump to its weakest pace since the global financial crisis.

  • This Activity Monitor outlines five key points on the coronavirus fallout for EMs, including what we can say about the impact so far. At the very least, it looks like the virus will cause aggregate EM GDP growth over this year as a whole to slump to its weakest pace since the global financial crisis.
  • First, activity in China is taking longer to return to normal than seemed likely earlier this month. Workplaces are still operating well below capacity, and it’s now highly likely that the labour market will take a hit. As a result, we no longer think that lost output in China will be fully recovered later in the year. Given this, we now think that GDP (on our CAP measure) will contract by around 25% q/q annualised in Q1 (a 2% y/y drop). We’ve also revised down our full-year forecast from 5% to 3%.
  • Second, the hit to tourism has started to broaden out beyond Asia. Data from Forward Keys show that flight bookings from the US to Asia fell by 90% y/y in the four weeks to 17th February. Scheduled departures to Central and Eastern Europe, and the Caribbean, are also down (by 7.7% y/y and 12.5% y/y, respectively).
  • Moreover, these figures pre-date the surge in cases outside Asia over the past week. As a share of GDP, tourism receipts are 15-20% in Cambodia and Thailand, and 4-6% of GDP in the likes of Turkey, Malaysia and Vietnam. This makes these countries highly exposed to a sustained drop in tourism income.
  • Third, supply chain disruption is becoming apparent. Reports suggest that major auto plants in Asia, including Hyundai and Kia in Korea, and Nissan in Japan, have been forced to temporarily halt production of some models due to a shortage of parts from China. And Samsung also temporarily closed a factory due to a coronavirus case. We’ll get a better sense of the hit to supply chains after Monday’s deluge of PMIs.
  • Fourth, EM financial conditions, so far, remain loose. Our index suggests that conditions are still much looser than in the past few years. (See Chart 1.) That said, this week’s sell-off means that financial conditions have tightened sharply in a short space of time. The tightening has been similar in scale to the beginning of the Taper Tantrum (2013) and the China hard landing fears (2015). (See Chart 2.)
  • Fifth, EM policymakers generally have scope to respond with stimulus measures, which may support a recovery in activity in the second half of the year. China, Korea and Malaysia have already announced large fiscal stimulus packages. Low public debt burdens in the region mean that there is scope for more stimulus if needed. Outside Asia, some large EMs (Brazil and South Africa) have little scope for stimulus. But in general, most EMs’ fiscal positions look healthy enough to allow governments to loosen the purse strings further if the virus starts to hit domestic confidence and spending.
  • On the monetary policy front, despite currencies weakening sharply, the impact on most EMs’ inflation rates should be modest, particularly given the fall in oil prices, which will provide some offsetting downwards pressure. And with inflation generally low too, the broad-based easing cycle will continue in the coming months. That said, even if stimulus does support a recovery in H2, it looks like aggregate EM GDP will growth will slump to a decade-low of just 3% over this year as a whole.

Chart 1: CE EM Financial Conditions Index

Chart 2: CE EM Financial Conditions Index
(t = days after sell-off starts)

Sources: Refinitiv, Bloomberg, CEIC, Forward Keys, Capital Economics


Edward Glossop, Emerging Markets Economist, +44 20 7808 4053, edward.glossop@capitaleconomics.com