China's economic growth in the first quarter could fall to as low as 3.5% if the spread of the new coronavirus is not contained fast enough for manufacturing production to resume to normal levels, Morgan Stanley analysts wrote in a Wednesday report.
Chinese health authorities on Wednesday reported a total of 74,185 confirmed cases and 2,004 cumulative deaths so far, most of them in the Hubei province — the epicenter of the outbreak.
Manufacturing activities around China have been disrupted as authorities shut down cities in a bid to contain the virus, now called COVID-19. While factories have started to come online, checks by Morgan Stanley analysts found that production had only reached 30% to 50% of normal levels as of last week.
China, the world's second-largest economy, is home to major parts of the global supply networks that produce goods from textile to mobile phones and cars. An extended shutdown of production lines in China will not only affect the supply of those products, but also hurt other markets' ability to produce their goods.
Morgan Stanley analysts said they expect manufacturing production in China to reach 60% to 80% of the usual levels by the end of this month, and be back to normal by middle to late March. But they warned of uncertainties surrounding the virus outbreak.
"Based on the evidence that production activities are currently resuming at a very gradual pace, we think that the current situation would be more in line with the scenario of 'gradual normalisation,'" the analysts wrote in the report.
"Given the uncertainties around the spread of the virus, we are watching the risks of transitioning to a scenario of 'extended disruption,'" they added.
Here's a summary of Morgan Stanley's forecasts for China's growth depending on how quickly factory production can resume:
Still, the analysts said the spillover to global growth is only for the short term.
"We expect that, once the effects of the disruption fade, the global economy will receive a bounce as companies move to resume production and that it would receive a boost as inventory levels are rebuilt to normal levels after the drawdown during the disruption," they wrote.
They also said China and other Asian economies — likely the most vulnerable to disruptions in Chinese production — could use policy measures to soften the economic impact. That would help those economies rebound in the aftermath of the virus outbreak, said the analysts.
Some measures China could take include cutting interest rates further and providing tax exemptions to affected sectors, they said.