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Coronavirus outbreak poses risk to US Fed's economic outlook

The potential effects of the spread of the coronavirus, which has sickened more than 6,000, mostly in China, and killed 133 since its detection early last month, took centre stage in U.S. Federal Reserve Chair Jerome Powell's news conference on Wednesday following the central bank's widely expected decision to keep interest rates unchanged.

January 30, 2020 / 08:25 AM IST

The outbreak of a new virus that originated in the central-Chinese city of Wuhan is likely to slow China's economic growth at least in the near term and could hurt its trading partners around the world.

The potential effects of the spread of the coronavirus, which has sickened more than 6,000, mostly in China, and killed 133 since its detection early last month, took centre stage in U.S. Federal Reserve Chair Jerome Powell's news conference on Wednesday following the central bank's widely expected decision to keep interest rates unchanged.

The Fed is "very carefully monitoring the situation," Powell told reporters.

While Powell noted that it is "too early to say" what the extent of the impact on the United States will be, he said it is "a significant thing which will have some effects on the Chinese economy, at least in the short term."

A Chinese government economist earlier on Wednesday projected the outbreak would cut China's first-quarter growth by one percentage point to 5% or lower.

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Powell also acknowledged the risks, including to the U.S. economy, from any slowdown in the world's second-biggest economy.

"China's economy is very important in the global economy now, and when China's economy slows down we do feel that - not as much though as countries that are near China, or that trade more actively with China, like some of the Western European countries," Powell said.

China has imposed travel restrictions and shut businesses and schools in an attempt to contain the outbreak, but it has not quelled rising concern among companies and governments across the world, some of whom are taking swift action.

Airlines including British Airways , United Airlines and Lufthansa are cutting or suspending flights, tourists are cancelling trips, and businesses including Apple and Starbucks are warning of the potential impact on their supply chains and sales.

Starbucks has closed more than half its cafes in China and Walt Disney shut its resorts and theme parks in Shanghai and Hong Kong during what is usually its busiest time of year. Alphabet Inc's Google has said it is temporarily shutting down its offices in China, Hong Kong and Taiwan.

"The coronavirus will likely have the largest negative impact on goods and services sectors within and outside of China that rely on Chinese consumers and intermediary products," Moody's analysts said in a report on Wednesday.

The assessments suggest the impact could be larger than that of the 2002-2003 Severe Acute Respiratory Syndrome (SARS) epidemic, the last novel virus to cause global alarm.

That outbreak resulted in about 800 deaths and slowed Asia's economic growth. But the overall effect on the U.S. economy was ultimately limited and short-lived.

But as the Moody's analysts and others point out, China accounts for a bigger share of global economic growth now than it did then, and the world is more closely connected.

Over the past week, amid news of coronavirus cases in the United States and more than a dozen other countries, trading in U.S. Treasuries reflected rising concern about a spillover effect.

Futures tied to the Fed's target policy rate also moved in the past week, and are now pricing in bets the Fed will cut interest rates again in July.

CAREFUL COMMENTS

In his news conference on Wednesday, Powell gave no hint the central bank plans to lower borrowing costs anytime soon. Indeed, he suggested the global risks from uncertain trade policy and slowing global growth, which prompted the Fed's three rate cuts in 2019, looked to be receding, prompting "cautious optimism" on the U.S. economic outlook this year.

Still, his careful comments about the impact of the coronavirus outbreak likely reflects behind-the-scenes work by Fed staffers, who brief policymakers at each meeting on risks to the economic outlook.

The Fed's May 2003 policy meeting, which occurred as the extent of the SARS epidemic was becoming apparent, began with a briefing on uncertainties, including the effect of the outbreak on various Asian economies and the potential knock-on impact for the U.S. economy, a transcript of the meeting shows.

Staff at the time modelled a worst-case "SARS demand shock" showing a 0.3 percentage point hit to U.S. GDP growth in the second half of 2003, with the impact lasting to the first half of 2004.
Reuters
first published: Jan 30, 2020 08:17 am

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