The Coronavirus and the Global Economy
As market volatility increases in response to the rapidly-evolving coronavirus outbreak, it is an appropriate time to offer a few brief observations from the perspective of the global economy and capital markets.
As of February 2, the World Health Organization notes 17,849 confirmed cases of the virus, with only 183 cases outside of China. While it is likely this outbreak will ultimately surpass the 2003 SARS epidemic with regard to total infections, the fatality rate appears to be much lower (2.2% vs. 9.6% for SARS).
Keeping with that comparison, estimates of the effect of the SARS outbreak on China’s GDP suggested a 1% impact1 on growth. This is a reasonable baseline assumption for the current coronavirus outbreak. The more proactive response from China and resulting abrupt changes in consumer behavior (during the Lunar New Year celebration) could further amplify the negative impact on demand – hopefully with the offset of quicker containment and recovery.
Beyond the impact on demand, global supply chains are being impacted during this outbreak. As many as 24 Chinese provinces have mandated a delayed return to work from the Lunar New Year to February 10. The technology sector in particular is highly exposed to supply chain disruptions in these areas as labor comes to a halt.
The market response is consistent with a view of sharp changes in demand behavior concentrated within China’s economy. Copper, a commodity in which China accounts for 50% of marginal demand, fell nearly 12% over the last two weeks as confirmed cases of the virus began to quickly rise. Travel-related companies, such as airline and hospitality stocks, have turned lower. The Shanghai Composite fell nearly 8% on February 3, the first day of trading after an extended New Year holiday.
History suggests it is a reduction of the rate of change in new cases, not total confirmed cases, that tends to coincide with a decline in market volatility. Unlike during the SARS outbreak, where China was criticized for moving slowly and an overall lack of transparency, the government has moved more quickly to quarantine cities and has proactively engaged with the international medical community during this outbreak. The Chinese government has already sequenced the virus and shared the information with the medical community globally for assistance in the development of tests to screen for the virus.
While the media is prone to exaggeration, it is clear this is a very serious and fluid situation with a wide range of potential outcomes. Putting aside the minute-to-minute updates and sometimes frenzied predictions, history suggests instances of prior viral outbreaks have a material, yet short-lived impact on the global economy. We have no reason to believe this time will be different. But we will continue to closely monitor this situation and how it may impact client portfolios.
1Jong-Wha Lee and Warwick J. McKibbin, “Globalization and Disease: The Case of SARS,” Brookings Institution, dated February 2004.
The above commentary represents the opinions of the author as of 2.3.20 and are subject to change at any time due to market or economic conditions or other factors. The information above is for educational and illustrative purposes only and does not constitute investment, tax or legal advice.