- Concerns about the containment of the outbreak reignite growth worries.
- Chinese consumers may curtail spending amid city lockdowns and travel limits.
- For now, we expect a one-off hit to GDP levels and waning market volatility.
The coronavirus outbreak in the city of Wuhan is clearly very serious from an epidemiological perspective. While data on the virus is changing rapidly, it has infected more than 6,000 people in China and killed at least 132 as of January 29, mostly in China’s Hubei province. From an economic perspective, it is clear there will be some disruption to economic activity in China and elsewhere.
Growing public health crisis
The virus is spreading rapidly outside the central province of Hubei. News that people may be infectious before they display any symptoms has rattled global financial markets and public health officials alike. Apart from the confirmed cases in China, there are a further 6,900 “suspected” cases and some 44,000 people under medical surveillance. Fewer than 60 people are reported to have recovered fully.
The disease is broadly tracking the 2003 outbreak of severe acute respiratory syndrome, or SARS, but the mortality rate is, so far, lower. More than 8,000 people fell sick and about 800 people died from SARS, leading to a mortality rate of 10%. On the same basis, we are now seeing a mortality rate of 2.2% from the coronavirus. About 89 cases have been reported in some 16 other countries, but to this point there have been no deaths outside China. We have to be cautious about this assessment because each day brings new data. At this point, we don’t know how many of the cases reported every day are “new” and not ones that are only now being recognized.
Economic activity and the virus
We believe the virus will pose a temporary economic threat as China takes numerous steps to slow the contagion. Factories will see their output drop as the government restricts transportation. People may choose not to travel — even if they are free to do so — and may not go out to restaurants, casinos, and cinemas. They may curtail shopping except for basic necessities. There are reports of sharp declines in visitors to Macau’s casinos.
While the disease, today, looks a little less serious than the SARS outbreak, there is concern that the economic repercussions could be greater.
Railway trips over the Lunar New Year holidays were 40% lower than a year earlier. Wuhan is a major city, located on the Yangtze river, and is of considerable importance in the trans-shipment of goods. While the disease, today, looks a little less serious than the SARS outbreak, there is concern that the economic repercussions could be greater.
Lunar New Year spending slows
There are two reasons for concern. First, the government is responding aggressively. China has taken a large number of measures to contain the virus, but this comes at an economic cost. Across large swathes of China, domestic transportation has been limited, foreign tour groups have been banned, and the Lunar New Year holiday has been extended for three days. These measures are aimed at keeping a large proportion of the population in at-home quarantines.
Second, the economy has changed a lot since the SARS epidemic. Consumption plays a bigger role, and the domestic service sector is larger. These two sectors are likely to be the most affected. As a result of SARS, GDP growth dropped by a couple of percentage points for one quarter. Under the current scenario, and given the restrictions already in place and the impact already in the pipeline, it seems highly likely that retail sales will fall sharply and consumption will be affected. Factory output will drop.
A one-off hit to GDP
Short of this becoming a major pandemic, however, it’s important to see the economic consequences in context. They are a one-off hit to the level of GDP. Although they will affect measured GDP growth, they don’t really have an impact on the underlying trajectory of the economy. Nothing much will happen to the overall growth story. We will be watching data flow about the disease — the number of cases and the number of deaths — to confirm our initial assessment that the coronavirus outbreak is less serious than SARS. Then we’ll watch for economic data, some of which will be very weak.
Big moves in asset markets, driven by these developments, should fade, in our view.
We would not be surprised if some of the data is bad enough to reignite concerns about a Chinese, or global, recession. Market volatility would be a natural concomitant of such fears. But right now, we see this as a major overreaction. A one-off hit to activity, even if it lasts for a few weeks, will produce no lasting economic effects. Big moves in asset markets, driven by these developments, should fade, in our view.