Coronavirus to infect Q2: Capital Group

The economic impact of the coronavirus has been grossly underestimated, with jolts likely to be felt well into the second quarter.

That's according to Capital Group economist Stephen Green, in a speech televised to attendees at the recent Financial Standard Chief Economist Forum in Sydney.

According to data collated by Johns Hopkins University, there are 64,410 confirmed cases of the coronavirus, with 1491 deaths globally. According to this data, the coronavirus has now well surpassed the death toll of the 2002-3 SARS epidemic.

Green said the real impact of the virus on the Chinese and global economy remains up in the air.

"Unfortunately, many of the key parameters for figuring out the impact on China's economy and the world economy are unknown," he said.

"How many people are really affected? How fast is the virus spreading? Is it going to spread outside of China in a very big way? How long will the economy have to be basically shut down?"

Green argues that coronavirus infections won't hit their peak until at least March or April.

"Most folk are assuming that we bounce back in the second quarter after basically a recession in the first quarter," he said.

"The projections suggest, to me at least, that unless we've been extremely successful in slowing down the spread of the virus in the past couple of weeks, the impact of the virus will extend well into the second quarter."

Instead, he believes the global economy will bounce back in the second half of the year.

"I think it's more likely that we have a very, very tough first half with a bounce back in the second half, assuming that we've contained the virus at that point. So I'm a little more negative than the market right now," Green said.

Negative, too, on economic growth in China.

"People were getting happier about China's economy this year based on the look of the stimulus, the end of the trade war, and the consumer doing okay," Green said.

"I came into this year believing that things were going to be tougher than that; I think we can see the consumer slowing, I didn't think the trade war was going to end, and at the same time, I didn't really see stimulus feeding through into China's economy."

He argued economic growth in the communist state was weaker and more volatile than official figures let on.

"I don't have enough data to say with any degree of real certainty that growth is really 3-4%, but I think it's weaker than 6%," Green said.

"So far we have seen no indication the economy was picking up in the fourth quarter of last year."

Green argued the slowdown in economic growth had a slump in productivity to blame; predicting figures could swing below zero in the coming year.

So too, do weak credit growth, the end of a real estate cycle, and dwindling trade and consumer confidence levels, point to a slowdown in Chinese economic growth, Green said.

He argued there was little the Chinese government could do to turn this economic prediction around.

"Ironically, Beijing's foot is already on the accelerator," Green said.

"The official government deficit is around 3-4% of GDP, that's the numbers the government reports."

However, he pointed to infrastructure development debt as a key reason for his scepticism on these official figures.

"We all know that China does an awful lot of infrastructure development off "balance sheet" that the governments establish; [from] local government investment vehicles, borrowing from banks and bonds," Green said.

However, Green said that when visiting these infrastructure projects Capital Group found that most of them were "non-profit making" and "non-revenue generating".

"We believe that most of that borrowing is in fact government borrowing," he said.

"So when you put those numbers into the budget, you get an estimate of somewhere around 10-15% of GDP deficit."

That's quite the difference from official figures.

Government debt was also causing Beijing's balance sheet to flash red, Green said.

"We believe that government debt is probably near 100% of GDP, rather than the reported 40%, so that constrains the ability of Beijing to stimulate the economy," he said.

Read more: ChinaCapital GroupGDPFinancial Standard Chief Economist ForumJohns Hopkins UniversityStephen Green
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