Coronavirus outbreak could threaten Trump economy

The outbreak of the coronavirus threatens to affect key sectors of the economy in an election year and in particular could spell trouble for President Trump’s “Phase One” trade deal with China.

As public health officials around the world scramble to contain the spread of the virus, others are beginning to warn of the economic influence across the globe.

The World Health Organization on Thursday declared the outbreak “a public health emergency of international concern,” and warned of the delicate balancing act taking steps to contain the disease while not damaging the global economy.

In the U.S., the Federal Reserve said it is watching for any economic fallout.

“There is likely to be some disruption to activity in China and possibly globally based on the spread of the virus today and the travel restrictions and business closures that have already been imposed,” Federal Reserve Chairman Jerome Powell cautioned on Wednesday.

China has already put the industrial city of Wuhan, a hub of 11 million people, under quarantine, and extended the Lunar New Year holiday, which sees millions of Chinese traveling, by a week to keep people from congregating in public places.

Simon Baptist, global chief economist of The Economist Intelligence Unit, said that if the virus follows the path of the SARS outbreak in 2003, China’s estimated economic growth could fall 0.5 to 1.5 points from a projected 5.9 percent growth rate this year.

“Travel, tourism and hospitality will be the most immediately affected sectors, but manufacturing could suffer if migrant workers are prevented from traveling back from their home areas after the Lunar New Year holidays,” he said.

American businesses are already being affected, with airlines canceling flights to China and other companies restricting travel to the country or warning of disruptions to their supply chains.

Trump has made the growing economy and low unemployment a centerpiece of his pitch to voters. But the prospect of ripple effects from China on manufacturing, a politically important industry that has faced job losses and falling productivity in the past year, could undercut Trump’s pitch to Midwestern voters in key swing states.

WHO Director-General Tedros Adhanom Ghebreyesus sought to ease fears in hopes of avoiding greater economic damage on Thursday.

“There is no reason for measures that unnecessarily interfere with international travel and trade,” Ghebreyesus said.

The Dow Jones Industrial Average, which had dropped 244 points in midday trading Thursday, rebounded to a 125-point gain when the WHO decided against recommending travel bans to China.

But efforts to clamp down on the virus, which has infected 7,834 people worldwide, the vast majority of whom are in China, has already had an effect on economic activity and further developments could hamper important industries.

“I don’t think at this point that anyone thinks the overall economic effect will be large, but for some industries there will be a noticeable impact,” said Mary E. Lovely, Senior Fellow Peterson Institute for International Economics.

In particular, industries that rely on components from China could struggle with prolonged quarantines. That could affect computers and electronics, furniture, appliances and medical devices.

S&P Global Ratings analysts Philip A. Baggaley and Rachel J. Gerrish said the airline industry could take a significant hit. In 2003, they noted, SARS cost airlines that worked in the Asia-Pacific region 8 percent of their revenues, peaking at 35 percent losses at the worst part of the outbreak.

The fallout could be amplified by the mammoth growth of China’s economy since 2003, when SARS lopped $33 billion off global economic growth.

Lovely said that businesses should start worrying more if China further extends its Lunar New Year holiday, or puts additional cities on lockdown, which could dampen consumer demand.

“My colleague just returned from China and said that people are just self-quarantining. They’re not out on the streets, they’re not out in restaurants, even during the holiday. It’s just eerie,” she said.

Despite seeking to calm markets, Ghebreyesus described the measures China has taken as having “severe social & economic impact” on the Chinese people.

Another cause for concern is the fate of the “Phase One” U.S.-China trade deal Trump inked this month. Under the terms of the deal, China promised to increase its U.S. purchases by $200 billion, a number economists said was unrealistic to begin with. Quarantines, cancelled flights, and declining business could make it even tougher for China to meet those goals.

“Even in the best of circumstances China purchasing commitments would be difficult to reach,” Asia Society Policy Institute Wendy Cutler noted on Twitter.

“Coronavirus makes it almost impossible,” she added.

On Thursday, Commerce Secretary Wilbur Ross sparked controversy when he spoke of an economic upside to the virus for the U.S.

“I think it will help to accelerate the return of jobs to North America, some to U.S., probably some to Mexico as well,” he told Fox Business, adding that he didn’t want to take “victory lap over a very unfortunate, very malignant disease.”

A Commerce Department official told The Hill that Ross “made clear the first step is to bring the virus under control and help the victims of this disease.”

“It is also important to consider the ramifications of doing business with a country that has a long history of covering up real risks to its own people and the rest of the world,” the person said.
A top White House official also said the virus would have no effect on the administration’s tough trade stance with China.

White House trade adviser Peter Navarro told CNBC that the outbreak would not cause the United States to loosen its tariff regime on the country, even if it dragged down Chinese growth.

“That’s a spin that’s coming right out of Wall Street, and it really, I think, it does a disservice to this whole crisis to bring that into the discussion,” he said.

American businesses are already reacting to the challenges from the outbreak. Starbucks said earlier this week that it had closed more than 2,000 stores in China, and Facebook said it would restrict travel to China by employees.

But one company is taking the outbreak in stride.

Maggie Bowman, communications director at Constellation Brands, said that she was not concerned about the virus’s effect on one of her company’s top brands, Corona beer. Searches for “Corona beer virus” spiked in recent days with consumers confused by the name.

“Consumers, by and large, understand there’s no linkage between the virus and our beer,” Bowman said.