I’ve not said much about the impact of the new coronavirus, partly because it’s a human tragedy and commenting on the economic and market implications can seem insensitive. It can also be hard not to appear complacent. But given the mounting concerns, reflected in the sharp falls in global equity prices in the past week, here’s my take. On balance, I’m still relatively sanguine.
First, the facts on coronavirus itself (the WHO is a good source). Coronaviruses cause illnesses ranging from the common cold to much more serious problems, including pneumonia and severe acute respiratory syndromes, such as MERS and SARS.
The current outbreak of a new coronavirus disease (COVID-19) was first reported in Wuhan, China, on 31st December . As of 29th February, the WHO database has logged around 85,000 cases worldwide in 54 countries. But it is worth stressing that almost all these cases (nearly 80,000) are still in China.
The death rate from COVID-19 is uncertain. Simply dividing the number of deaths (around 3,000) by the number of recorded cases may give an overestimate, because many people with the virus may not actually have any symptoms and so not be recorded. The quality of treatment is also improving.
For what it is worth, the WHO itself suggests a death rate from COVID-19 of 2% so far, compared to 9%-12% for the 2004 SARS outbreak and as high as 40% for MERS. But other sources suggest a death rate of no more than 1%. Interestingly, the death rate in China, outside Hubei province, is just 0.4%. That’s not much higher than the 0.1% globally for seasonal flu in a bad year.
On the other hand, the COVID-19 virus seems to spread relatively easily, either by close personal contact or by coughs and sneezes, and unlike seasonal flu, very few will have acquired any immunity. A relatively low death rate (compared to other coronaviruses) could therefore be outweighed by a relatively large number of people catching the new virus.
We do know that the disease is most dangerous to older people: around 80% of the fatalities in China have been people aged over 60, often with pre-existing health problems, as the chart below shows. People of working age, and children, appear to be at much lower risk (not that this means the elderly don’t matter, of course).
Looking forward, there are some reasons for optimism on the health impacts, including the prospect of warmer weather (in the northern hemisphere) and the speed with which scientists have been able to analyse the COVID-19 virus (which will hopefully bring forward the development of an effective vaccine, though that may still be more than a year away).
China is also the obvious place to start to assess the economic impact. As we know, the Chinese government has now taken draconian measures to limit the spread of the new coronavirus and the effects have been clear in the data. My old friends at Capital Economics are providing regular updates and some handy charts, which show that activity ground to a halt in February.
Consistent with this, China’s official manufacturing PMI slumped to a record low of 35.7 in February. The non-manufacturing index was even weaker, at just 29.6. Overall, China’s GDP is likely to fall in the first quarter, both in quarter-on-quarter terms and perhaps year-on-year as well. Given China’s growing importance to the global economy, that alone is significant.
Nonetheless, this should be as bad as it gets. The containment policies appear to be working. China’s factories are now gradually reopening, even if output is typically still well below normal. The government and central bank have already provided some additional stimulus and are preparing more.
Put another way, Chinese companies are often critical to global supply chains, but these companies are slowly getting back on their feet. The amount of output that has been lost has been lower than otherwise because many factories would have been shut anyway for part of this time because of the Lunar New Year holidays. Overall, any supply disruptions are likely to be measured in weeks, not months.
In the rest of the world, there have been some local hotspots of the disease, notably in northern Italy and South Korea, and some tough government responses elsewhere too, including an extended school shutdown in Japan. But elsewhere, there is little evidence – yet – of widespread damage outside China itself.
For example, the flash PMI for the eurozone did note a marked lengthening of supplier delivery times in February, but delays for inputs were also this long as recently as December 2018. Activity in the services sector also still picked up, despite concerns about the impacts on travel and tourism.
Of course, it is still early days, and it is possible that conditions will deteriorate a lot further in the coming weeks and months. There does already seem to be more evidence of a coronavirus impact in the PMIs for Australia and Japan.
However, unless you, your family, or perhaps your business, is directly affected, the virus outbreak is a temporary shock to supply rather than to demand. In other words, you may be limited in some of the goods and services that you can buy, or want to spend your money on. However, your income should largely be unaffected, and you can either switch spending to other goods and services, or delay spending for later.
It is also worth noting some potential offsets. For example, people who are less willing or able to travel abroad may spend more money in their local economy instead. Even if they are less willing to go to the shops, they may buy more online. Businesses may do more video conferencing. Parents stuck at home looking after children may still be able to do some work remotely, and so on.
So, what about that reaction in stock markets? Valuations have been looking increasingly stretched for some time, and it may well be that COFID-19 has simply been the trigger for a long-overdue correction. But it does seem hard to justify the slump in equity prices on the basis of coronavirus alone, unless you believe that the global economic impact could be bad enough to wipe out several years of corporate profits and/or drive lots of firms out of business altogether. I still think that’s unlikely, though again that could change.
What’s more, the reaction in other markets may actually help to cushion the impact. In particular, the fall in oil prices is good news for consumers, while interest rates and borrowing costs look set to remain lower for longer.
Finally, I’m wary of putting numbers on all this. But it is important to try to keep any headline figures in perspective. For example, Oxford Economics has quantified a plausible scenario in which a global pandemic could cut world GDP by $1.1 trillion. This would probably be enough to tip some vulnerable economies into recession (within Europe I’d be most worried about Germany and Italy). But even this would only amount to 1.3% of one year’s global output, and incomes.
We’ve also had the ever-popular shock numbers for the billions, or more, that have been wiped off share prices. Again, these need to be seen in the context of the starting point. We may just have seen the worst week for global stock prices since the 2008 crisis, but this followed a very long run of good ones. The recent falls in US markets in particular have made only a small dent in the rally over the previous decade.
Of course, those concerned about valuations may conclude that there is a lot more weakness to come, especially given the underlying fragility of the global economy before the virus struck. Merryn Somerset Webb is especially good on this, and perhaps she’s right. But the impact of the new coronavirus would then only be playing a bit part.
In summary, this looks for now like a temporary and localised economic shock, rather than something likely to cause a global recession or prolonged market meltdown. Nonetheless, it would clearly be foolish to dismiss the risks lightly. It could still all go horribly wrong.