Coronavirus-induced negative GDP likely

The Brett Chulu

THE International Monetary Fund (IMF)’s Article IV report on Zimbabwe released on February 24 gave a forecast of a real Gross Domestic Product (GDP) growth of 0,8% for 2020. This forecast did not take into account the impact of the coronavirus. Following the release of the IMF report, the coronavirus contagion has spread to major economies, including South Africa, the single biggest trading partner to Zimbabwe.

A negative GDP for Zimbabwe is now highly likely as we begin to get a better understanding of the impact of the coronavirus on supply chains, global production, consumption and trade patterns. The manner in which the big global economies are being affected is getting clearer.

In Italy, soccer is being played in empty stadiums. Italy has halted most travel in the country. A wider ban in Italy affecting all public events was due to be announced on Tuesday, directly affecting cinemas, theatres, gyms, discos, football matches, among others.

According to Reuters, Saudi Arabia, a major oil producer, had recorded five new cases on Monday. In the UK, five deaths had been recorded at the time of writing.

The major stock markets have plunged. The Dow Jones industrial index plunged 2 000 points. The Trump administration, in response to the impending coronavirus-induced United States economic slowdown, is considering tax cuts and granting loans to small businesses. The announcement had an immediate impact — the stock markets rose. Stock markets are fickle — the uncertainty of the coronavirus means there is still a huge risk that could spook the markets. While writing this article, some major stock markets had plunged 7%.

Donald Trump is also urging the Federal Reserve Bank to cut the Fed interest rate to stimulate borrowing in order to stave off collapse in consumption, the US’ key driver of economic growth in the past 12 years. A number of analysts do not see interest rate cuts doing much to lift the economy battered by the coronavirus impact as interests on major economies are already low following successive years of cuts.

The Australian share market’s benchmark ASX200 fell by 3,7% on Monday. The US Securities Exchange Commission, on Monday, advised part of its staff to work from home. An outbreak at sea on a ship called Princess with 3 500 people on board was reported this week. Australian airline, Qantas, is reported to have reduced its international flying capacity by 25% — a total of eight Airbus A380s have been grounded, leaving just two of its largest planes flying.

Qantas’ chief executive, Alan Joyce, has announced that he will forgo his salary for the rest of the financial year. Qantas will ask its staff to go on unpaid leave to avoid job cuts. Egypt has banned large gatherings of citizens and inter-governorate movement of people.

South Africa, our neighbour and largest trading partner, accounting for 60-70% of our trade, had reported 17 cases by yesterday. Zimbabwe’s economy, no doubt, will be impacted by the coronavirus through global impacts transmitted directly and indirectly.

The model of how Zimbabwe is likely to be impacted by the coronavirus should be based on the major drivers of the Zimbabwe’s economy in terms of production, consumption and forex inflows.

Big-name forecasters such as Oxford Economics, Bloomberg and the Organisation for Economic Co-operation and Development have revised global economic growth forecasts for 2020 due to coronavirus. Bloomberg has four coronavirus-related scenarios for global economic growth for 2020. Under the four scenarios China’s real GDP growth will contract by between 0,7% and 2,4% and that of Germany by between 1,5% and 3,6%. The worsening economic-impact scenarios assume that China will increasingly take a long time to return to normal (U-shaped recovery as opposed to a quick V-shaped recovery).

Under the worst-case scenario, US$2,7 trillion of output will be lost. Under that scenario, China’s GDP will be 3,5%, a serious contraction, given that China’s economy of late has been growing in the 6%-plus region.

Zimbabwe’s economy will be negatively affected due to China’s and global economic slowdown weakening demand for our key exports, namely nickel, platinum, gold and tobacco.

The gold price slumped 4% in the wake of the spread of the coronavirus outside China to other big economic powerhouses. Investors’ expectation of the US administration and the central banks of the big western and northern economies responding to the coronavirus-induced economic slump by way of policy-easing (mainly interest rate cuts), causing bond assets to be less attractive, caused a 1% recovery in gold price, reflecting that the coronavirus fear is likely to have an overall negative impact on commodity prices.

Platinum is not spared. Platinum price fell by almost 1% in the wake of the coronavirus spread fear. New car sales growth is expected to dip due to both supply and demand dips — this means less demand for platinum. Nickel is similarly affected. A slump in nickel demand is expected as China the major consumer of nickel has restricted mobility, closed a number of factories and announced extended work holidays.

Supply chain disruptions as a result of China’s restrictions will affect global producers who get components from China’s low-cost production centres. China is the world’s largest producer and consumer of tobacco cigarettes.

The World Health Organisation (WHO) estimates that there are 300 million smokers in China, nearly equal to the entire US population. China is Zimbabwe’s biggest destination (directly and indirectly). In China, imports and exports of tobacco (leaf and cigarretes) are under the state agency called the State Tobacco Monopoly Agency. Tobacco, is a major forex earner for Zimbabwe, generating just under US$1 billion annually.

The fact that exports of tobacco into China are controlled centrally by the Chinese state means a China imposing its tobacco imports ban will see our Zimbabwe tobacco industry taking a hard knock. There is a growing focus on the hypothesis that smoking increases the risk of making coronavirus very acute.
WHO has not given an official statement on the tobacco-coronavirus association.

Michael Ryan, a WHO expert, at a press conference in Geneva said connecting smoking rates and coronavirus death rates was an excellent hypothesis, but was not yet proven. In the age of information explosion and rapid information dissemination, fears can be easily stoked, causing an impact on tobacco demand.
There are more pathways from the coronavirus that will cause our economic growth to take a significant knock. Our biggest GDP drivers from a productive sector angle are distribution, hotels and restaurants (13,5%), education (11,4%), agriculture, hunting, fishing and forestry (10%), public administration (9,4%), transport and communication (8,9%), manufacturing (8%) and mining and quarrying (7,2%).

From the policy responses of nations that have been hit by the coronavirus, in its early stages, we have seen that the first productive sectors to be affected are the services industry. Productive-sector analysis of GDP contribution shows that the services sector contribute 43,2% to the GDP.

In the short-term, the coronavirus will strike hard at almost half of our GDP drivers in a sharp way. The primary productive sectors (mining and agriculture) as well as the secondary sector will face supply chain disruptions as both production and and distribution of components and raw materials from China, South Africa and Germany are disrupted.

Our country has no capacity right now to engage in policy-easing such as interest cuts to address the coronavirus. Helicopter money may be the policy response authorities may lease to address the coronavirus impact to avoid an ouright out-of-control humanatarian crisis. Helicopter money will accelerate inflation, currency over-weakening and strengthen de-dollarisation resistance.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.

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