Coronavirus: can we breathe easy?
As 2020 gets into full swing it is news of a potentially devastating virus that has gone viral. As such, I thought I would take a look at the the potential economic and sharemarket impact of the Coronavirus. It suggests that while the economic and sharemarket impact may well get worse in the short-run – especially for certain sectors and countries – chances are it should not provide the knock out blow to the global economy and the decade long bull market that some fear.
The novel coronavirus is a particular viral strain (2019-nCov) emerging out of China that has not previously been detected in humans. Like previous viruses that have infiltrated the human population, such as the Severe Acute Respiratory Syndrome (SARS), the concern is that their severity and degree of contagiousness is not immediately known.
As at the time of writing, there have been around 4,500 reported cases and 106 deaths.
The SARS Outbreak of 2003
Probably the best comparison to the current virus concern is the SARS outbreak – which also originated in China – nearly 20 years ago. Following early reports of an apparently new human-affecting viral strain in late 2002, the World Health Organisation (WHO) issued a world health alert on March 12, 2003. To contain its spread, many countries imposed travel restrictions, and consumers themselves – especially around Asia – sharply curtailed travel and shopping.
As seen in the chart below, the number of reported SARS cases continued to escalate for several months thereafter, before clearly levelling out by early July. Indeed, on July 5, 2003, the WHO declared the SARS outbreak was “contained”, after no new new cases were reported over the previous two weeks.
Source: World Health Organisation (WHO) and ‘Box A: Severe Acute Respitory Syndrome (SARS)’, RBA, August 2003
All told, around 8,500 people worldwide were in infected, of whom around 800 (~10%) died. The death rate was particularly high (around 50%) for those aged over 65 years.
Due to official travel bans and broader consumer caution, the SARS outbreak caused acute short-run economic costs, especially in China and neighbouring countries. Retail spending around Asia slowed significantly over April and May 2003, as did tourist arrivals. That said, these effects were relatively short-lived, with Asian economic activity beginning to recover by the second half of 2003.
What’s more, the global economy more broadly was less affected, being helped somewhat by both a lift in optimism following a quicker than feared end to the US-Iraq war that also began in March, and also by an ongoing underlying cyclical recovery following the brief US recession of 2001.
Indeed, global growth actually accelerated in 2003 to 4.3% from 3.0% in 2002. If anything, the SARS outbreak likely held back what would have otherwise been an even stronger global rebound in 2003.
As evident in the chart below, global stocks shrugged off SARS concerns fairly easily in 2003, while Asian stocks were more negatively affected for at most a few months only.
Is This Time Different?
Of course, historical comparisons can be hazardous due to differing economic circumstances.
In particular, China is now a lot more important to the global economy than it was in in 2003, with its share of global GDP rising from around 9% to 20% over this period. As seen in the chart below, the number of Chinese outbound tourists has also surged over this period from around 20 million per year to around 160 million, around half of whom travel beyond Hong Kong, Macau and Taiwan. But while that could make containment somewhat harder, China also appears to be making somewhat stronger and quicker steps to deal with the problem this time around.
Having only suffered a modest growth slowdown in recent years – rather than a recent recession – the global economy also has fewer cyclical tailwinds to enjoy than in 2003. This makes any new negative economic shock potentially more destabilising.
The good news, at least so far, is that the coronavirus does not appear as serious as the SARS outbreak – in fact the World Health Organisation has yet to declare a world health alert.
What about Australia?
Australia is also one of the developed economies most exposed to the outbreak, with Chinese inbound tourism estimated at five times more important to the economy than in the case of the United States. Indeed, although twice as many (3 million) Chinese visit the US each year compared to Australia (1.5 million), America’s economy is 10 times larger than ours.
The negative impact on Australia is especially ill timed, coming in the wake of recent bushfires and a substantial slowdown in private spending. During the SARS outbreak in 2003, the number of monthly tourists from China declined by 80% in the three months from February to May. Today tourism accounts for around 3% of GDP, of which China accounts for around 20% (or 0.6% of GDP).
So broad calculations suggests a halving of Chinese tourism number over a quarter could directly knock off 0.3% from quarterly GDP growth. We can add to that a negative impact on tourism from the recent bush fires.
- If local consumer spending, business investment and housing construction also remain weak, this increases the risk of a GDP outcome this quarter perilously close to zero. Allowing for multiplier effects and weakness in tourism from Asia more generally, the negative impact on growth could be even weaker. Offsetting this, more Australians could choose to holiday at home rather than China or elsewhere in Asia – but they could also just as likely choose to divert their holidays to other parts of the world.
- Of course, assuming the virus is contained within only a few months (as was the case with SARS in 2003), the negative impact on local economic growth should be short-lived, with tourism likely to rebound by the second half of the year. But Australia faces a difficult growth challenges over the next few months.
All up, while history suggests there are grounds to be confident the latest virus outbreak can be contained, it also suggests we may still face several more months of rising infection rates and associated market concern. As such, the crisis is still likely best seen as a buying opportunity.
Indeed, buying opportunities might become most evident in the Asia region given they are likely to suffer the most in the short-term – and also because they’ve now been denied the chance to further recover following recent easing in US-China trade tensions. Examples include our ASIA ETF, which aims to track an index of the 50 largest technology and online retail companies in Asia ex-Japan. Although overall retail spending may decline in the short-term, fear of infection may lead many Asian consumers to buy even more online in coming months than they do already.
Along with the negative impact of the recent bush fires, the likely slowdown in Asian tourist numbers will also particularly affect Australia relative to other developed economies. Indeed, while the US receives twice as many Chinese tourists as Australian each year (3 million vs. 1.5 million), it’s economy is more than 10 times bigger. As a result, and despite last week’s stronger than expected employment report, it likely adds to the case for further RBA rate cuts over coming months.
It also suggests the recent period of Australian equity market out-performance may not last. Indeed, Australia’s equity market now appears relatively expensive by global standards despite having a relatively subdued earnings outlook. Recent outperformance appears to reflect local investors being forced into taking on more risk in the face if sustained low local interest rates.
Globally, China’s increased economic importance also suggests global equity markets may also not as easily shrug off the virus outbreak in the short term as they did in 2003. Thankfully, however, low US inflation means the Federal Reserve might quickly provide further monetary support if need be, and a market-sensitive US President – facing re-election – might also continue to talk up the tantalising prospect of further tax cuts.
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Author, columnist, investment strategist and macro-economist. Previous roles at Federal Treasury, OECD, Macquarie Bank and AFR. I develop economic insights and portfolio construction strategies for BetaShares' retail and adviser clients.