Coronavirus: How will the outbreak affect the global economy?

The SARS pandemic in 2003 caused growth to slow down in China, but the effect was short-lived

The spread of a new coronavirus across Asia and into Europe and the United States has created a challenge for governments and health authorities desperate to stem its advance.

While the primary focus is on preventing deaths and averting mass panic, it is inevitable that economists and investors are looking at what the impact might be for growth and financial markets.

As Holger Schmieding, chief economist at Berenberg bank wisely points out, economists are not qualified to judge how dangerous the spread of the virus may eventually be.

But they can look back at previous episodes and the obvious incident to reach for is the SARS pandemic in 2003 that grabbed the headlines as it caused around 800 deaths and led to severe disruptions in China between March and May of that year.

Economic data for 2003 show a temporary dip in Chinese GDP growth during the height of the SARS pandemic to 9.1 per cent in the second quarter of 2003 from 11.1 per cent in the previous quarter, followed by rates of 10 per cent in the final two quarters of the year.

Capital Economics estimates that global growth lost roughly one percentage point of growth but by the end of the year was some three points higher than before the SARS outbreak. The main impacts stemmed mainly from falls in retail sales and travel as people sought to avoid crowds through fear of contagion.

The key question is what has changed in the structure of the Asian and global economies that might indicate a different — better or worse — outcome this time. There are perhaps three fundamental shifts.

The first is the sheer size of China’s economy. Back in 2003 it accounted by 6 per cent of global GDP whereas now it is more than 15 per cent which means that, to borrow an old but apposite phrase, when China sneezes the whole world is at greater risk of catching a cold.

Secondly, the explosion of social media means that bad news travels even faster than it 17 years ago, meaning there is a greater risk of misinformation causing panic and causing uncertainty that leads people to cut back on travel and spending plans.

As Paul Donovan, chief economist at UBS Asset Management, put it: “The rise of fake news over social media means fear can spready globally more quickly. It is fear of disease, not disease itself, that has the biggest economic repercussions.”

The hope is that these will be offset by the third factor, a greater level of preparedness by the authorities than 17 years ago, both in terms of taking action to contain the virus and in ensuring they ahead of the news.

As the death toll in China passed two dozen, Beijing responded swiftly and decisively to the outbreak, putting 10 cities under lockdown, stopping local transport services and cancelling flights to prevent the usual mass movement of people for the New Year festival. Last year it took some four months to officially report on the SARS outbreak.

No one can rule out the possibility that the coronavirus will be worse than SARS and there is an obvious danger in complacency. But spreading panic can be equally harmful and for now, the expectation is that the global economy will take a temporary hit from which it will soon recover.