The Economic Impact of Coronavirus

The coronavirus, which has quickly spread across China and now abroad, led to a dip in global equity markets in late January. While financial markets have drawn comparison with the SARS epidemic in 2002–03 — which took approximately six months to stabilise and resulted in the death of 774 people — the speed of the coronavirus outbreak and the ultimate cost in human life is still indeterminable. Accordingly, there has been increased market volatility and it is likely that the virus will lead to a significant impact on economic growth for the first quarter of 2020 and potentially beyond.

The coronavirus originated from the Chinese city of Wuhan, 830km to the west of Shanghai and Capital of the Hubei Provence. Wuhan is located in Central eastern China and has a population of 58.5 million people. To prevent the spread of the coronavirus China has closed off the city of Wuhan, a city larger than London, and much of the Hubei province.

At the time of writing the official number of confirmed cases has risen dramatically to more than 37,500 and there have been 637 deaths — two of which have occurred outside Mainland China, one in Hong Kong and one in Philippines. There are some reports that the actual number of cases could potentially be much higher due to deaths being incorrectly attributed, as around 10 million people die in China every year, or approximately 27,000 people per day. In recent times there have been multiple viral outbreaks, for example H5N1 virus, Ebola and Swine Flu, that have threatened to become epidemics or worse, pandemics. Fortunately, this has been avoided due to concerted action on the part of governments.

The impact on financial markets so far has been mixed and to date, markets appear to have held up reasonably well even though volatility has risen. Equities have worn the brunt of the initial impact and safe-haven assets such as government bonds have rallied. Taking this a step further, in equities, Chinese and Asian markets were the hardest hit. Domestically, the major negative economic impact on Australia is likely to be on those sectors most reliant on Chinese students (education) and tourism. The mining sector will also likely suffer more heavily due to the impact of the virus on Chinese GDP and the market sentiment.

Illustrative of all major fixed income markets, Australia’s 10-year bond yield ended 2019 at 1.37% p.a. and has since fallen and reached a trough of 0.91% p.a. on 1 February 2020. Other safe-haven assets like gold, Japanese Yen and US Dollars have also gained over the last fortnight.

Over the past week, the equity markets have taken an optimistic view and looked beyond the doom and gloom of the virus despite all the negative headlines. However, the longer that the epidemic keeps spreading and the death toll rises, the more that negative sentiment will continue to weigh on markets, particularly Asian equities. There has not been any real slowing down in the rate of infection or the death rate; so, for now, the risk from the coronavirus remains real.

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