Strategy & economics
Coronavirus outbreak: tracking the economic and financial market impact
Global markets are taking fright at the spread of a dangerous new virus across China, known as coronavirus. So far 80 people have died and there have been 2,744 confirmed cases of the disease – according to the Chinese government.
Lessons from the 2003 SARS outbreak
The outbreak is drawing comparison with the SARS epidemic of 2003. SARS (severe acute respiratory syndrome), which caused 800 deaths, had a real, but short-lived, impact on the economy. China’s GDP growth rate slowed from 11% in the first quarter of 2003 to 9% in the second – mainly through the hit to tourism and transport. When SARS was eventually contained, the pace of GDP growth quickly recovered, resulting in growth for the year of 10%.
The economic impact this time round depends on how quickly the outbreak can be contained. We expect that there will be a significant hit to retail activity, especially with the outbreak occurring during the key consumption period of Chinese New Year. We also anticipate significant disruption to industrial and trade activity.
Wuhan, a city of 11 million which has been identified as the origin of the virus, is an important transport and manufacturing hub. It is effectively in lockdown. As part of its efforts to tackle the crisis, the government has extended the national New Year holiday, which will result in further delays to supply chains and output.
SARS in 2003 vs coronavirus in 2020: key differences
One key factor is China's enlarged services sector. It now accounts for 53% of China’s GDP, compared to 42% in 2003. If the virus is not quickly contained, a slowdown in consumer spending could have a bigger impact on the country's wider GDP – though it is possible that the rise in online retail will help offset the negative impact.
There are other important differences.
Back in 2003, Chinese industry was relatively resilient; today, trade tensions and the structural slowdown in growth have left it in a weaker position. The Chinese economy also carries more debt than it did in the past, removing a potential source of support. In 2003, credit growth exceeded 20%, something which would not be possible in today’s environment.
More encouragingly, the government has taken prompt action in relation to the coronavirus outbreak – and there is a high level of awareness of the virus and methods to prevent its spread. This is very different to 2003, when precautionary measures were not as effective and the government was less forthcoming with information.
Coronavirus: stock market response
Fear and uncertainty could well lead to further weakness in equity markets, especially after their very strong performance in 2019. Sectors such as transportation and traditional retail are most vulnerable, while healthcare and e-commerce could outperform.
The SARS experience suggests that once the situation is contained, however, activity will bounce back sharply. If the negative effect on the domestic economy intensifies, we expect the government to strengthen policy measures to support targeted sectors, leading to a rebound in activity later in the 2020.
Global economic impact
With subdued levels of growth in the rest of the world, the virus could be a source of potential disruption over the coming months. China is now more important to the world economy than ever.
During the SARS outbreak, China made up 4.2% of the global economy, and contributed 18% to world GDP growth. In 2018, its share of world GDP had risen to 15.8%, with 35% of global growth coming from China, according to Piya Sachdeva, an economist at Schroders. She says “If the outbreak continues for a significant length of time, the levels of disruption will negatively impact trade partners, especially the rest of Asia, Australia, and potentially Europe. The recovery in global manufacturing, which has just started, is now in danger of being derailed.”
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This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
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All data contained within this document is sourced from Cazenove Capital unless otherwise stated.