Coronavirus and the world economy
The outbreak of the coronavirus epidemic in China has shaken the global asset markets—and with good reason. The coronavirus has the potential of being the ‘trigger’ which will push the world into a global depression.
Here, we briefly explain why.
The outbreak
It looks that the virus spreads very easily, through droplet infection and with a “latency” period that allows infected people to spread the virus before they themselves exhibit symptoms. This implies that the virus has already spread much more widely than original estimates indicate. The individual cases popping up across the globe are one confirmation of this.
Fortunately, the fatality rate is still relatively low: under 2 percent. However, this can change, especially if the virus mutates, and there’s already speculation, whether the figures provided by China can be trusted.
China in trouble
As we have been warning through 2019 (see, e.g., this and this), China’s economy is ripe for a serious downturn. Beijing used most of its remaining firepower last year, when it desperately tried to postpone the inevitable recession, probably to appear strong in the trade negotiations.
Despite record-breaking stimulus enacted in 2019, the Chinese economy has grown at a sub-par rate of around six percent. And this is according to the official statistics! In reality, the actual Chinese growth rate has probably been much lower.
As China’s State-Owned Enterprises, or “SOEs”, have become riddled with debt, their ability to increase production has stagnated. This has also contributed to the broader stagnation of productivity growth in China (see Figure 1). After the growth of SOEs faltered in 2017, the Chinese consumer has become an important driver of the economy.
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