Global Daily – The coronavirus and the global economy

by: Nick Kounis , Aline Schuiling , Bill Diviney , Arjen van Dijkhuizen

Global Macro: Economic impact of coronavirus likely significant but transient – The spread of the deadly novel coronavirus has undermined investor risk appetite, leading to a slide in equity and commodity prices, a widening of credit spreads and support for safe haven assets such as government bonds and the Japanese yen. In this Global Daily Insight we assess the potential impact on the global economy.

Epicentre of economic shock is China’s services sector – The vast majority of cases up until now (98%) have been in China, so this is where the economic impact will mostly be. The main effect is likely to be on household consumption, as consumers avoid public spaces by choice, but also due to restrictions on movement and travel imposed by the authorities to control the spread of the virus. On the output side, the services sector will be most affected, with travel services, retail trade, entertainment and catering likely to see a hit. There will also be disruption to production capacity to all parts of the economy as shops, offices and factories remain closed due to the restrictions of movement. Given that some of these businesses would have been closed anyway for part of the period due to the Chinese New Year, this could alleviate some of these effects. Finally, potentially tighter financial conditions, due to the loss of risk appetite in markets, and a knock to consumer and business confidence, reflecting heightened uncertainty, could also undermine economic growth. Heightened uncertainty could weigh on capital spending in particular. On the other hand, increased government spending on health and other measures to control the virus as well as potential additional monetary and fiscal policy easing could cushion the blow.

Experience of SARS – The length of time it takes to get the virus under control and the extent to which it spreads in China and beyond will obviously be the key determinants of the economic effects of the novel coronavirus. Perhaps a good starting point to assess the impact is the effects of the SARS coronavirus in 2003. The impact of SARS was relatively short-lived. The fall-out in that case was mainly felt by services (through impacts on consumption and tourism) and these recovered strongly once the virus was under control. As the chart below shows, there was a sharp fall in GDP growth in the four economies most impacted (China, Hong Kong, Taiwan and Singapore) in Q2 2003, but a sharp rebound in the quarter thereafter.

A well-known study quantifying the economic impact of SARS by Jong-Wha Lee and Warwick J. McKibbin (see here) estimated that the hit to China’s GDP growth was 1.1 percentage points, Hong Kong’s 2.6 pp and Taiwan and Singapore each 0.5 pps. In their temporary shock scenario (which seems to most closely resemble reality), that economic impact unwound very quickly and real GDP returned back to the previous baseline.

In a recent note on the current novel coronavirus episode, S&P Global makes a tentative back -of-the-envelope calculation to give a sense of the impact on China’s GDP (see here). Assuming that spending on discretionary services falls by 10%, they estimate GDP would fall by 1.2 percentage points. This might be too pessimistic given the relative size and importance of the geographical area impacted. Assuming the estimate is in the right ball park, the impact on global GDP growth – also assuming some knock on effects – would be 0.2-0.4 percentage points.

What would this mean for our base scenario? We currently expect global economic growth to bottom out but remain relatively weak in the first half of this year before a moderate recovery in the second half (with our forecast sitting below consensus). Assuming a transient SARS-like shock, the first half of the year would likely be weaker than in our base line, while the second half of the year would be stronger. The year average growth estimates would likely not change too much. We are not making changes to our GDP growth forecasts at this stage, but risks to H1 GDP growth are tilted to the downside.

Could the shock be worse? All of this assumes a relatively temporary shock, with the novel coronavirus being brought under control in the next few months in line with the case of the SARS virus. This raises the question of whether the current episode could take longer to get under control, with bigger and more persistent economic effects. The SARS virus also originated in China. The first cases were registered in November 2002. In February and March 2003, the virus spread to other countries and by mid-March 2003, the WHO issued a global alert, and an international network of laboratories was established to try and find the causes of the disease and a possible treatment. Still, it was only about a month later, in mid-April, that officials in China raised the alarm and news about the disease reached the headlines in China. Authorities admitted that they had seriously under-reported the number of cases until then and China’s health minister was replaced. In the second half of May 2003 the spreading of the disease slowed down and in early-July 2003, the WHO declared that the outbreak had been contained. All in all, almost 8100 people from almost 30 countries were infected by SARS, with the death rate close to 10%.

With regards to the novel coronavirus, scientists say there is still a lot of uncertainty about the new virus and how it spreads and/or mutates. Still, reports from China’s health minister suggest that it could spread faster than SARS, as the new virus can be spread during the incubation period (which can be as long as around two weeks), unlike the SARS virus, which only spread after the patient had fallen ill with the symptoms. On the other hand, the Chinese authorities seem to have handled the situation much more pro-actively than in 2003, and have taken drastic measures to contain the spreading, such as travel bans and school closures. So far, more than 2000 people have been infected with the novel coronavirus (the vast majority in China), with the death rate at around 3%, although this will unfortunately probably rise. Our initial impression is that the SARS episode is a reasonable base line to judge the assess the economic effects of the novel coronavirus although the level of uncertainty is of course high. (Nick Kounis, Aline Schuiling, Bill Diviney & Arjen van Dijkhuizen)