Much depends on if and when the outbreak of coronavirus in China is brought under control. But as it stands at present, the effects on the UK economy have probably been negligible.
- Much depends on if and when the outbreak of coronavirus in China is brought under control. But as it stands at present, the effects on the UK economy have probably been negligible.
- Our China Economics service is the place to look for analysis of the economic fallout there. In short, we have cut our forecast for Q1 growth from 5.5% y/y to around 3% y/y. Based on the evidence from past epidemics, for now we think this lost output will largely be made up over the rest of the year.
- As for the UK economy, the direct effect via a disruption to trade and a decline in tourist arrivals from China might only be mildly negative, especially if the lost output is made up over the rest of the year. Admittedly, UK goods exports to China account for 5.5% of total goods exports, or 0.9% of UK GDP. But many exports may be delayed rather than cancelled. Meanwhile, the number of visits to the UK by Chinese tourists made up just 1.2% of total visits in 2018 and 3.2% of all expenditure by foreign tourists in the UK, or 0.03% of GDP. (See Chart 1.)
- It is the same for many of the other economic effects too. If UK manufacturers are unable to acquire certain components from China, they may have to halt production or pay more to source the components from elsewhere. So there may be some disruption for certain industries or sectors in the UK, such as the electronics and textile sectors which source a greater proportion of their components from China. But the effects on consumer prices are unlikely to be especially large given that UK goods imports from China are equivalent to only 9.3% of the total and less than 1.5% of the UK CPI. Put in context, a 10% rise in these prices would only prompt consumer prices to increase by 0.1%.
- The bigger risk to the UK economy could come from the fallout in global financial markets. UK equities have suffered about as much as their counterparts in other developed markets. (See Chart 2.) Even so, the 5% decline in the FTSE 100 since its recent peak on 17th January is far smaller than the move seen in late 2018. And while this certainly won’t lift consumers’ spirits, it is unlikely to be big enough to dissuade consumers from continuing to spend more. The fall in oil prices – from $64pb in January to $56pb – will probably dampen UK inflation slightly and provide an offsetting upward effect on consumers’ incomes.
- The epidemic would probably need to escalate significantly for the Bank of England to respond by cutting interest rates. Governor Carney last week highlighted “the need to be vigilant” to the threat from the virus but the MPC did not appear too alarmed. Admittedly, in the Bank’s May 2003 Inflation Report, the MPC noted the disruption associated with the SARS outbreak. It then cut rates in July 2003. But that was in response to a more general global economic slowdown and the MPC hiked rates in November 2003.
- Of course, the big unknown is when coronavirus will be brought under control. The longer the industrial shutdowns in China persist, the bigger the impact on the global economy via supply chains. (See here.) There may then be bigger indirect effects as the UK’s exports, imports and tourists to and from other countries are affected too. And ten years into a global equity bull market, the potential for the virus to trigger a significant market correction is much greater now than it has been during previous epidemics. (See here.)
- Overall, the effects on the UK economy currently seem modest. But much depends on how the virus spreads. This is one downside risk to the global economy – and perhaps the UK too.
Chart 1: Spending by Overseas Tourists
Chart 2: Global Equity Indices (1st Jan. 2019 = 100)
Ruth Gregory, Senior UK Economist, +44 20 7811 3913, email@example.com