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The coronavirus outbreak may have a two-quarter hit on China’s economy, says Stephen Roach

The coronavirus outbreak is likely to hit China’s economy over the course of two quarters, Stephen Roach said on Friday.

“The Chinese economy is flat-lining right now,” said Roach, who is a senior fellow at Yale University.

“The impact of unprecedented quarantines and restrictions on travel have brought the Chinese economy right now to a virtual standstill,” Roach told CNBC’s “Squawk Box.”

He said that indicators of economic activity in China, such as coal consumption and transportation traffic, are “well below” the levels this time last year, or in the aftermath of any recent Lunar New Year holidays.

Beijing started imposing large-scale lockdowns and quarantining cities in late January, which halted factory and economic activities that are gradually coming back online.

The outbreak of the coronavirus has struck over 82,000 globally, according to the Feb. 27 figures from the World Health Organization. Known formally as COVID-19, the virus has spread beyond China, pummeling markets.

Still, Roach said he hoped the Chinese government will not let up on efforts to contain the coronavirus outbreak even though there will be short-term economic impact.

“A premature relaxation of quarantines and travel restrictions could lead to a relapse that would be far more dangerous than the outbreak at present,” said Roach, who lived in China from 2007 until 2012 during his tenure as chairman of Morgan Stanley Asia.

“The Chinese would want to avoid that at all cost. That’s important for the rest of the world where the infection is clearly in the process of spreading right now,” added Roach.

Economic disruption to last longer than SARS

Roach said he expected the disruption from COVID-19 to last longer than the damage SARS wrought 17 years ago.

“My baseline view … is that this will last longer than the SARS-related disruption, which was one quarter. This is probably a two-quarter hit on the Chinese growth rate,” he said.

That is because the Chinese and the world economy was already growing more slowly than in 2002-2003 when severe acute respiratory syndrome hit.

“The upside of any V-shaped recovery is likely to be shallower than it was 17 years ago,” he said.

Although governments are already pushing out stimulus packages to help cope with the economic impact of the outbreak, Roach said it was “ludicrous” to imagine that fiscal and monetary policy would be able to arrest the downside of physical measures taken to contain the spread of the epidemic.

“These measures are basically insensitive to policy action,” he said.

Instead, “what fiscal and monetary policy can do would be to attempt to stabilize markets — which is certainly important — but most importantly, to underwrite the upside of this subsequent recovery once economies like China and elsewhere go back to work. So they’re playing for the other side of the virus-related impacts, not the downside,” said Roach.