Coronavirus a threat to China’s economic growth

Markets have been hit by the spread of coronavirus in Asia. The economic cost, particularly for China, could be severe.

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  1. Garry White

The economic risks of epidemics are not trivial. The spread of a deadly new coronavirus from China has raised fears of a pandemic that could crush growth as the economic cycle becomes long in the tooth. If the virus continues to spread, what would be the impact on the global economy?

Perhaps the most remarkable trend in infectious diseases is that, although the number of outbreaks are increasing, scientific advances have reduced the number of deaths. However, at the same time, the economic impacts of infectious diseases appear to be increasing as the world has become more interconnected through trade and travel. The World Health Organisation has also warned that epidemic-prone diseases such as Ebola, influenza and Severe Acute Respiratory Syndrome (SARS) are increasingly difficult to manage in the face of prolonged conflict, fragile states, and forced migration.

The current viral outbreak started in the Chinese city of Wuhan but has since spread to Japan, Hong Kong, Thailand, South Korea, France and the US. Markets have taken the issue more seriously since China confirmed that the deadly respiratory disease can be transmitted between humans, as the virus has emerged at the worst possible time.  

Biggest human migration

The outbreak came just before the Lunar New Year, ahead of which many Chinese criss-crossed the country to see their families over the holiday period. This, which is often described as the "largest human migration in the world", provides an ideal opportunity for the virus to spread. Chinese officials have estimated that the number of trips by Chinese citizens related to the holiday could be as much as three billion and has tried to limit travel from Wuhan but with an incubation period of five days, this could be too little too late.  

A sizable outbreak can overwhelm health systems, limiting the capacity to deal with routine health issues. Epidemics also force both the ill and their carers to miss work or be less effective at their jobs, hitting productivity. Fear of infection can result in social distancing and closed schools, businesses and public services, disrupting economic activity.

In the west, the luxury goods companies such as Burberry, Hermes and Christian Dior parent LVMH have been hit, as the Chinese market is a major driver of the sector. Chinese shoppers account for 35% of all luxury goods sales and 90% of last year's growth in the market, according to consultancy Bain. The valuation of US casinos such as Las Vegas Sands and Wynn Resorts have also been hit, as they have sizeable operations in places such as Macau.

Shares in Chinese airlines and travel businesses have fallen sharply after authorities unveiled measures to limit flow of people to and from Wuhan and instructed airlines to process refunds for flights to the city free of charge. China Southern Airlines has the highest capacity exposure to Wuhan among the three big Chinese airlines, at about 3p%, according to Goldman Sachs. China Eastern Airlines’ domestic capacity for Wuhan is 2.2%, while Air China’s capacity is 1.3%.

Chinese GDP at risk

However, the biggest danger is the impact on Chinese growth, which fell to a 29-year low in 2019. At the height of the SARS outbreak almost 20 years ago, China’s GDP growth slid from 11.1% year-on-year in the first quarter of 2003 to 9.1% in the second quarter. A two-percentage-point fall in growth could be regarded as particularly benign. However, China’s economy is likely to be more vulnerable now than it was in the SARS pandemic because of Beijing’s success in boosting its service sector.

In the SARS outbreak, the biggest slowdown was seen in two services categories – “transport, storage and post”, and “hotels and catering”. These are now significantly larger parts of the Chinese economy. A slowdown in growth in China would hit countries such as Australia, which exports a significant amount of raw materials to the country, as well as derail targets agreed in the phase-one trade deal signed last week, further damaging relations between Beijing and Washington.

The SARS outbreak caused more than $50bn (£38bn) worth of damage to the global economy, despite infecting fewer than 8,000 people and having caused just 800 deaths, the World Economic Forum has calculated. This implies that the economic cost of such a disease outbreak is driven mainly by fear – which leads to people avoid social contact to protect themselves, indirectly impacting growth.

Cost could be greater

According to World Bank estimates, the annual global cost of moderately severe to severe pandemics is roughly $570bn, or 0.7% of global income. However, the fear factor should the virus continue to spread could depress equity markets by a greater amount.

However, although SARS sent Hong Kong into recession and the Hang Seng index fell almost 7.5% in the first quarter of 2003, the market quickly recovered throughout the rest of the year, so any impact could be temporary. In these cases, markets tend to bottom with the peak in new cases and news flow. Providing Beijing gets to grips with the disease, a buying opportunity could be presented in coming weeks and months.

However, the real risk remains that the disease could mutate into a more virulent form, hitting Chinese growth at a sensitive time for the global economy. This week’s Golden Week holiday in China could not have come at a worse time. However, the mortality rate of the virus is relatively low – currently around 3.8%. That should provide some reassurance.

A version of this article appeared in Friday’s Daily Telegraph.

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