Impact of Coronavirus to Ripple Through Global Economy

February 9, 2020 Updated: February 9, 2020

News Analysis

The economic impact of the coronavirus is rife with uncertainty, but current signs suggest that things could get ugly very quickly if the virus is not contained.

Already the virus has spread much faster and more widely than SARS (severe acute respiratory syndrome). And as Chinese cities go into lockdown and countries impose restrictions, the economic consequences of the coronavirus are likely to be far-reaching.

SARS and Why It’s Different This Time

A useful point of reference is the experience of 2002-2003 when SARS hit the Chinese economy. Estimates suggest that SARS took about 1 to 2 percentage points off China’s GDP growth rate. But that was before China became the second largest economy, before China became highly integrated into the global supply chain, and before China became the largest contributor to global trade. Today, things are clearly different and it likely means that the economic impact of the coronavirus will ripple through the global economy.

Forecasters have already revised down their forecasts for GDP growth in 2020 by around 0.3 to 1 percentage point. But the downside risks are large—the obvious one being that if the virus is not contained and continues to spread, the effects could be long-lasting. But also, China’s economy is much more vulnerable than it was in 2002, with annual growth in 2019 slowing to its lowest point in almost three decades.

Perhaps the largest difference with SARS is how the people and the Chinese regime have responded this time. So far, authorities have issued mass shutdowns and quarantines, both mandatory and voluntary. This has greatly reduced economic activity. The Chinese regime has extended the Lunar New Year holiday to keep people indoors and away from large crowds.

It’s unclear when people will go back to work. Many private companies such as Apple, Google, Starbucks, and Ikea have already shut down their stores and offices in China. As the coronavirus continues to spread, the chances of large disruptions across the Chinese and global economy increases.

No industry is feeling the impact more than the airline industry. As countries impose travel restrictions to prevent the spread of the virus, international travel has declined and airlines around the world are canceling flights to and from China. But the damage won’t be limited to airlines. Global industries that are geared toward China such as tourism, universities, technology, food, and agriculture will all face headwinds as demand from China slows dramatically.

Markets Reel

The pain is already being felt in equity markets.

The Shanghai Composite Index fell over 8 percent after reopening on Feb. 3. Other equity markets also suffered losses as news about the extent of the virus spread last week. Asian equity markets were hit hardest. Since Jan. 22, equity prices in Hong Kong (HSI), Japan (NIKKEI) and Korea (KS11) have fallen by 5.5, 3, and 4.5 percentage points, respectively.

Other markets have not been immune to the effects, with U.S., European, and the Australian market all posting losses since the coronavirus spread further across countries.

The total effect of the coronavirus on the Chinese and global economy is contingent on many factors that are yet to play out. But don’t be surprised if what ends up unfolding is much worse than what many economists are predicting.