ifo Institute: Consequences of the Coronavirus Could Cost Germany Growth

“Greater production losses in Chinese industry could appreciably intensify the effects of the coronavirus on the German economy,” explains Timo Wollmershäuser, Head of Forecasting at ifo, pointing to the importance of Chinese industrial goods for the value chains of German industrial companies. Chinese industrial goods account for 9.4 percent of German imports of intermediate goods. The effects in the rest of the euro area would be much smaller due to a lower level of integration with China and amount to a reduction of only 0.01 percentage point in GDP growth.

ifo’s calculations are based on the assumption that the epidemic largely manifests itself in more restrained consumer spending in China and that the large-scale quarantining of the population will limit the supply of labor. Both of these factors are only a temporary burden on the Chinese economy. “The effects on consumption and on industrial production in China should be clear as early as the first quarter of 2020,” Wollmershäuser says.

In making these assessments, Wollmershäuser’s team drew on experience from the SARS epidemic. According to the WHO, SARS infected just over 5,000 people in China between November 2002 and July 2003. No significant economic slump was recorded until the second quarter of 2003. Growth in China’s gross domestic product weakened to 0.9 percent compared with the previous quarter, which had seen an increase of 2.9 percent in economic output, but GDP growth picked up again as soon as the third quarter, reaching 3.7 percent. All in all, the negative impact on the Chinese economy was only very short term. Nevertheless, the SARS epidemic is estimated to have dampened GDP growth by about 1 percentage point in 2003.

However, it is too soon to say whether or not the outbreak of the new coronavirus will have more serious consequences than the SARS epidemic. For example, the number of people in China currently infected with the coronavirus is already significantly higher than the number of registered SARS cases. But the government has also reacted faster and the measures it has taken are far more comprehensive. Indeed, the large-scale quarantine measures that have been introduced could have a considerably greater impact on industrial production in China than during the SARS epidemic.