Panic buying inflation tipped to fade as virus hammers demand

[HONG KONG] Shortages of goods and food triggered by the coronavirus outbreak has raised the spectrr of faster inflation across Asia in coming months.

Yet that short-term spike is expected to be overwhelmed by slowing economic growth in both China and the region as tourism, travel and manufacturing slump. Commodity, energy and transport costs have already fallen.

"The short-term effect is inflationary as it is a negative supply shock," said Alicia Garcia-Herrero, chief Asia Pacific economist at Natixis SA. "But as the world worries about the coronavirus spread, it becomes a negative demand shock with downward pressure on inflation."

While the hit to China and the global economy has become more evident as each day of the virus disruption passes, the impact on prices has been harder to assess due to the conflicting forces. Over the longer term, a dis-inflation scenario suggests central banks and finance ministries will need to bring down interest rates and ramp up spending to offset the slump.

How the inflation story plays out depends on how soon factories in China get back to work and supply chain kinks get ironed out. Bloomberg Economics estimates China's economy was operating at around 40 to 50 per cent of its normal level last week.

Corporate giants including Nike Inc, Toyota Motor Corp, Apple Inc are warning about the hit to their production and manufacturing. Strict flight curbs and travel restrictions are slowing the return of workers to factories in China and the flow of goods around the region.

"The question is how extensive is the disruption in global supply chains," said Pierre Siklos, an inflation expert at Canada's Wilfrid Laurier University and author of Central Banks into the Breach.

"If the virus spreads and this leads to a loss of confidence globally, then the impact will be felt through a reduction of demand, which will help alleviate the global supply disruption but will further complicate the low inflation problem advanced economies face."

By one estimate, most US factories in China's manufacturing hub around Shanghai will be back at work this week but the "severe" shortage of workers will hit production, the American Chamber of Commerce in Shanghai warned.

They said almost 60 per cent of firms expect demand to be lower than normal over the next few months and nearly half said their global supply chain had already been affected.

The near-term price impact will be most evident in China, where consumer prices were already gaining rapidly before the outbreak. Inflation accelerated to 5.4 per cent in January, the fastest in more than eight years, driven by higher food prices on the back of the spread of swine fever.

The slump in demand will keep a lid on core inflation though, not just in China, but around the region too. Several Asian countries may see inflation reverting to a negative reading including South Korea, Japan, Singapore and Thailand, according to Chua Hak Bin, senior economist at Maybank Kim Eng Research Pte.

"The deflationary impact from the collapse in demand, particularly in China, will outweigh any inflationary pressure from supply disruptions," he said.

BLOOMBERG