Impact of epidemic on service sector is being overestimated

In their reports on the impact of the novel coronavirus epidemic on different industries, some research institutions have provided revenue loss estimates. Some reports have even gone as far as predicting the revenues of some sectors, such as restaurants and catering, hospitality, tourism, entertainment and transportation, will fall off a cliff.

While it is impossible to obtain accurate statistics on the impact of the epidemic on the service industry as a whole, it is possible to spot a serious problem with the data provided by many research institutions, which vary a great deal as a result of the different statistical methods used.

Take the tourism industry as an example. When calculating its revenue, each sector takes into account all the industries involved in its business activities. For example, we generally consider tours, passenger transportation and accommodation (mainly hotels) to be the three main pillars of the tourism sector. When calculating the revenue of the tourism sector, income from restaurants and catering, retail, hospitality, entertainment, tours and transportation are all taken into account. In 2018, the tourism industry in China had gross revenues of 5.97 trillion yuan ($849 billion), which already included some of the income considered in the above-mentioned categories; likewise, out of the 4 trillion-plus yuan revenue generated by the restaurant industry, tourism-related income was also counted.

Therefore, we cannot simply add up the revenues or loss of revenues in the restaurant, retail and tourism sectors due to significant double counting. The same applies to the calculation of revenue or loss of revenue in services and other sectors.

In other words, while the epidemic will undeniably cause a significant revenue loss to those service industries in the short term, simply adding up the estimated losses in all the industries involved will lead to a gross overestimation of the impact on the service sector as a whole.

The service sector is not the only one to suffer significant shocks over the near term, as manufacturing and the entire industrial chain will also be affected, but not severely as long as the epidemic is brought under control soon. We can say that the most severe economic impact of the epidemic is going to be felt during the one-month period between late January around Chinese Spring Festival and the end of February. As factories and businesses began to reopen in mid-February, the economic impact of the epidemic will fade gradually.

To be specific, in the manufacturing sector, many companies are going to see sluggish revenue and investment as they face canceled orders and delays in reopening. Hua Chuang Securities estimates that only 29.7 percent of migrant workers were back at their jobs by Feb 12. With the remaining workers under centralized or home quarantine in affected areas, companies are facing a considerable shortage of labor as they reopen.

Having said that, investment is likely to suffer less than consumption as a result of the outbreak, according to a report by PricewaterhouseCoopers. For example, the auto industry was already seeing a decline in sales and production in 2019. As dealerships and automakers still have a large inventory, production halts as a result of delays in reopening will only have limited impacts on companies (the first quarter's capacity utilization in some manufacturing subsectors is usually the lowest due to the Spring Festival holidays). While the extension of the holiday period will delay the reopening date of numerous small, medium-sized and micro enterprises by several weeks, local government policy support has kicked in, facilitating reopening in the vast majority of regions. Therefore, the manufacturing sector is likely to see limited losses in output in the first quarter.

Given the large scope but apparently limited duration of the epidemic, GDP growth in the first quarter is likely to decrease by 30 to 50 percent, or 2 to 3 percentage points if we estimate real growth rate to be 6 percent on trend. In the unlikely event of growth rate declining by more than 50 percent, we would see GDP in the first quarter decrease by nearly 1 trillion yuan, which would be equivalent to a loss of 3 trillion yuan in revenue or output. Assuming that 70 percent of output comes from services, that would mean a 2 trillion yuan loss in the sector, which is likely the worst-case scenario. In the same vein, should the epidemic be brought under control within the first quarter and the economy rebounds in the second quarter, the epidemic will likely shave 0.5 to 0.75 percentage points in GDP trend growth.

In conclusion, as long as we can get the epidemic under control before the end of the first quarter, its impact will be compensated by the recovery in the rest of the year as the economy rebounds in the second quarter and the second half of 2020.Kristalina Georgieva, managing director of the International Monetary Fund also said, when responding to a reporter on Feb 12, that the fund was already collecting data in preparation for a comprehensive analysis of the impact of the epidemic on the global economy. She points out that the Chinese economy is poised for a prompt recovery as factories reopen and inventory is replaced, and that a V-shaped recovery is the most likely scenario. In other words, the Chinese economy will bounce back quickly after the slump, and the impact of the epidemic will be relatively manageable.

The author is dean of the School of Economics at Fudan University, director of China Center for Economic Research and associate dean of Fudan Development Institute. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.