Coronavirus hasn’t devastated the global economy yet – but it could if it’s not contained soon

The outbreak has come at a bad time in the economic cycle, and with no sign of it being controlled, it’s not surprising that the markets are troubled

How grave is the likely impact of coronavirus on the world economy?

That might seem a callous question to pose when people are dying, and it is certainly far too early to be able to give a definitive answer. But the world is having to make a decision on how to react. In the case of the UK, the government is considering how to evacuate British citizens from Wuhan, with the first flight reportedly scheduled for Thursday. The harsh fact is that China is the world’s second-largest economy as well as being the world’s most populous nation, and large parts of it are in effect being cut off from the rest of the world.

Yesterday, Hong Kong closed most of its borders with mainland China, Carrie Lam, its chief executive, making the announcement wearing a face mask. The World Health Organisation (WHO) says it is confident that China can contain the virus but this view has been criticised for its complacency.

So how serious is it really? Well, there is a template against which we can calibrate what is happening now with what happened in the past: the impact of the Sars virus, which struck China in 2003. As we learn more about the scale of the pandemic, we can begin to see the extent to which the coronavirus is likely to be more serious than Sars.

Inevitably, Sars was closely studied from a health policy aspect and the WHO came up with a number of recommendations as to how countries should respond in the future.

The WHO did not look at the economy as such, but other studies have come up with an estimate that the loss to the world economy was some $40bn. That takes into account the loss of economic output as measured by GDP, mostly in Hong Kong and mainland China. The loss in Hong Kong was equivalent to 2.6 per cent of GDP; in the rest of China a little over 1 per cent. There was also some spill-over into southeast Asia, but nothing significant in Europe or North America – or indeed in the developed world as a whole.

If this sounds like a reasonable position, at least from a global perspective if not from a Chinese one, there are three reasons why this may be worse.

First, China is much more important now than it was then. In 2003, its GDP was some $1.6 trillion, a bit bigger than Italy but smaller than France or the UK, accounting for about 3 per cent of the world economy. Now it is more than $14 trillion, which makes it just under 20 per cent of world GDP.

Second, China is much more of a service economy now. That makes it more vulnerable to loss of output. If your main activities (and exports) are manufactured goods, you can cope with interruptions of output by storing goods, and by catching up later. Your customers may have to wait a bit longer, but loss of output can be offset. If, on the other hand, you are principally a service economy, loss of output cannot be recovered. The empty hotels, restaurants, and airline seats are lost forever.

Third, the long-term reputational damage lasts longer, because China is much more integrated with the rest of the world than it was almost 20 years ago. In the early 2000s its interface with the world was principally as an exporter of cheap goods. Now it is a major owner of business in the west (think Volvo or London taxis), a major force in the new media (Weibo), and of course, a major supplier of telecom kit, as the current kerfuffle about Huawei reminds us.

If you are simply buying children’s toys, or cheap clothing from a country, its wider reputation may not matter much. If you are buying Huawei equipment, it matters very much indeed. What is significant is not so much the original blow, for all countries face environmental and public health challenges – remember the mad cow disease issue that hit the UK in the 1980s and early 1990s? What's important is how it is handled, and the way in which China copes with this outbreak.

There is a final twist. The broad consensus of economic opinion is that the blow to the world economy will be somewhat larger than that of Sars, but will be reasonably easily managed within the totality of global output. The world economy is so huge that it can cope with one region taking a beating. That consensus is probably right. The twist is this comes at a bad time in the global economic cycle, and that timing has I think been the main reason why the markets have been so troubled in the past few days. We need some encouraging signals that the coronavirus is being contained, and so far they have not been forthcoming.