Coronavirus costs are beginning to mount as China spending falls

Coronavirus costs China spending falls wages Australia share market
The Chinese economy is being largely impacted from the outbreak of the coronavirus.

The costs of the coronavirus are starting to mount as signs out of China show an alarming fall in spending and wages.

Many Chinese private companies have been forced to cut wages dramatically as the containment measures really start to bite, along with the growing death toll which has now climbed above 2,000 people.

While the worst effects are in the crisis hit Hubei province where the virus began spreading, official advice for people to cut back on travel and to avoid crowds and consider staying at home have had a much wider effect across the Chinese economy.

Travel related businesses are naturally doing it tough while the restrictions have hit education and have been emptying out shopping malls and restaurants and leaving theatres and amusement parks closed.

Wages falling fast, along with spending

This is having direct knock on effects on worker’s wages with unpaid leave and large wage cuts taking effect and consumption also well down.

The Chinese government is helping by extending credit through state owned banks to small companies to keep them afloat but eventually quarantined workers will need to make do with much less money.

Even fast-growing technology companies such as Chinese giant Alibaba have signalled a significant earnings downturn this quarter – the first time this has happened.

While chief financial officer Maggie Wu said the downturn should be a one-off event, by its nature the spread and severity of the coronavirus still remains something of an unknown quantity.

Australia also in the firing line

Australian companies such as the big miners BHP (ASX: BHP) and Rio Tinto (ASX: RIO) will obviously be hit by the effects of the coronavirus within China while the travel bans are already a big effect on the tourism and education sectors of the Australian economy, with around 100,000 students unable to resume their studies.

Silver lining could be why share markets are still rising

However, there is a silver lining to every crisis no matter how bad and in the case of the coronavirus, now known as COVID-19, some of the pent-up demand for products and services will cause a bulge of activity in the future – particularly when combined with government stimulus measures.

That has certainly been the case in the past when disasters such as the Fukushima nuclear accident and the Christchurch earthquake caused a rash of economic rebuilding activity in future years.

It is similar in the case of the coronavirus with increased health spending on new hospitals and care just the initial boost in spending with other delayed spending still to come.

This coming lag effect and the continuation of stimulus measures by governments is seen by some as the reason why share markets have continued to test record highs even in the midst of the global spread of the coronavirus.

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