The coronavirus currently spreading from China has garnered much attention during the last several weeks. As markets continue to digest new information coming out of China and around the world, we wanted to take a moment to summarize what has been confirmed so far and what the potential economic impact could be going forward.
What is it?
The new virus is part of a family of viruses known as the coronaviruses. Originating in common animals, their growing legacy comes from their ability to mutate and infect humans. This new variant will be the seventh in the coronavirus family, all of which impact the respiratory system. The most famous variants are SARS (Severe Acute Respiratory Syndrome) and MERS (Middle East Respiratory Syndrome).
Where did it come from?
The outbreak has been traced to Wuhan, a Chinese city with a proper population estimated to exceed 11 million people - larger than New York City or London proper. It is the capital of the Hubei province, which is estimated to have a population greater than 60 million people, roughly 50% more than the state of California. The landlocked province in central China is a major transportation hub as well as a strong presence in agriculture and manufacturing.
How dangerous is it?
While we are still in the initial phases of understanding the virus, early indications are that it is less lethal than some of its related pathogens. Fatality rates have been estimated somewhere in the range of 2-3% of those infected. SARS, for example, killed closer to 10% of those who were infected by it. On the other hand, it is far more dangerous than the common influenza (flu) virus that we see in the United States, which has a fatality rate of approximately 0.1%. Many still hope that the number of those infected with the coronavirus is still underreported and that its rate will come down to potentially something similar to the flu. One of the many difficulties of a new disease is getting accurate information.
Data as of early this week puts the number of infected at 17,000 which will most likely climb significantly higher as more researchers are deployed. The deaths so far reported are around 200. For comparison purposes, the flu this season in the US has infected roughly 20 million people and has killed around 10,000. The fear of the coronavirus, however, is how quickly it could potentially spread especially before more treatment options become available. Disease-model experts from Imperial College London have estimated each infected person spreads the virus to 2.6 other people. This does place it higher than the average influenza virus but much lower than something like measles which infects more than 12 people on average.
What is the impact so far?
China has reacted very aggressively, taking the unprecedented step of essentially quarantining the entire province. Time will only tell if this is an effective strategy or if it could cause panic among those still stuck inside. Many airlines have already shut down the majority of their routes through China and are waiting a couple of weeks before opening them again. Many US companies with employees in China have shut down their businesses and are encouraging them to stay at home for now. The Chinese and US stock markets both sold off following the news but have found some stability this week. Oil prices sold off sharply with an expectation of lower demand in the short term and Saudi Arabia has said it will cut supply to try and support prices.
What are the implications going forward?
Looking at historical precedents is a good place to start in trying to analyze the coronavirus’ possible impact. SARS caused a sharp decrease in the Chinese economy, but it quickly rebounded. The avian and swine flu in 2006 and 2009 seemingly had little impact on the global outlook though they did occur during an already tumultuous market.
However, many economists are wondering if there could be a greater impact this time around. One major reason is how much larger China has grown in importance to the global economy. During the SARS outbreak, China represented roughly 4% of global GDP while it currently represents closer to 16%. This is also coming on the back of relatively sluggish growth for the world’s second-largest economy. Hope for the end of the trade wars had prompted higher estimates in growth going forward but could now be tempered depending on the spread of the disease.
At this point, the world stock markets have revised their expectations for the year slightly downward. Containment has been enacted swiftly and the hope is that the fatality rate is not nearly as high as initially reported. The news is negative for China and there are risks for them that this may encourage more companies to move supply chains out of the country after already dealing with the unknowns of the trade wars. There will be some specific industries such as airlines and tourism that will see downward pressure in the short-term. Overall as the disease is contained, the most likely outcome is some short-term pressure followed by stronger pent-up demand and normalization of economic growth.
Areddy, James T. “Coronavirus Closes China to the World, Straining Global Economy.” The Wall Street Journal. Dow Jones & Company, February 3, 2020. https://www.wsj.com/articles/coronavirus-closes-china-to-the-world-straining-global-economy-11580689793?mod=djem10point.
“China's Coronavirus Semi-Quarantine Will Hurt the Global Economy.” The Economist. The Economist Newspaper, January 30, 2020. https://www.economist.com/international/2020/01/30/chinas-coronavirus-semi-quarantine-will-hurt-the-global-economy.
“Companies Warn of Economic Crisis as China Fights the Coronavirus.” The Economist. The Economist Newspaper, February 4, 2020. https://www.economist.com/finance-and-economics/2020/02/04/companies-warn-of-economic-crisis-as-china-fights-the-coronavirus.
McKay, Betsy. “What to Know About the New Chinese Coronavirus.” The Wall Street Journal. Dow Jones & Company, January 29, 2020. https://www.wsj.com/articles/what-we-know-about-the-wuhan-virus-11579716128?mod=article_inline.