This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here
The current fatality rate of the coronavirus is at 2.0%. This lags that of SARS at 9.6% and MERS at 35%. Yet, this novel coronavirus is far more contagious, and has a longer 14-day incubation period.
For the time being, becoming infected by the regular flu (Influenza) is far more likely in the U.S. ...and deadlier. Nevertheless, investors around the world showed very little restraint in reacting to the health threat. Traders swiftly caused a decline in all major global indexes. Then, an equally swift rebound.
In particular, the last few days of January -- after the World Health Organization declared the coronavirus a Global Health Emergency -- were another demonstration of how quickly not only the virus can spread. But also: How quickly fear among already-edgy momentum traders can cause kneejerk reactions in risk markets.
With this in mind, we provide an overview of the implications of a further outbreak of the virus:
1) Direct effect on the Chinese economy: Since the first cases emerged in December in central Wuhan city, the virus has cost over 638 lives and infected 31,420 (World Health Organization data on Feb. 7th). China claimed 31,161 infections and 636 deaths. As a result, the Chinese Government has taken the illness much more seriously than SARS. They introduced severe travel restrictions.
Many areas remain on complete lockdown. The Chinese military health authorities quarantined more than 50 million people, in hopes of containing further infections, by reducing communal interaction to an absolute minimum. This was easier said than done, with weeklong Chinese New Year festivities planned in January.
With the SARS outbreak in 2003 still in recent memory, it seems natural to expect a similar overall effect on the Chinese society and economy. But things have changed a lot since then.
For one, China has developed much closer ties with the rest of the world. Its share of the global economy has risen from 4% in 2003 to 15.5% today. Subsequently, the amount of travel by both individuals and products, are massive compared to 2003 during the SARS outbreak.
Back then, mainland China’s economy witnessed a decline of -2.4% in the quarter of the SARS outbreak. But there might be a more significant decline this time around. Chinese consumption amounts to more than 2/3s of their economy (similar to the U.S.). This will make the Chinese urban and travel curfews much more impactful. The Lunar New Year would have been similar to the U.S. Christmas shopping season -- in terms of retail and discretionary spending in general.
Meanwhile, online shopping makes up a much larger chunk of mainland Chinese retail sales -- think Alibaba (BABA - Free Report) and JD.com (JD - Free Report) . That can soften the blow in our expectation.
2) Indirect effect on the rest of the world: At first, equity markets the world over got spooked by the coronavirus outbreak. Traders (already euphoric and supported by daily Fed repo buying) watched every news development closely. Early on, news-algo driven risk markets moved in perfect lockstep with Bloomberg headlines. Stock price declines initially focused on industry ETFs that were directly hit, such as airlines and oil producers.
Market losses soon extended across the board to the broader markets. More and more U.S.-listed multi-national companies, such as Starbucks (SBUX - Free Report) or Apple (AAPL - Free Report) , suspended operations and closed their retail stores in affected areas.
For slower moving economists like us, it is a tad premature for sanguine projections on the direct and indirect effects of the coronavirus. But supply chains across the globe are highly intertwined. Closed factories in China won’t take long to trickle down the rest of the supply chains – across multiple industries and sectors.
It is our expectation, however, the coronavirus is becoming more contained. Overall spillover effects on the global economy will be limited and temporary.
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