More than 64,000 infected, GDP cuts, and SARS parallels: Here's how bad the global economy could get as the coronavirus outbreak rages
- Coronavirus has infected 64,000 and killed 1,380 so far. And as the health crisis worsens, it's become increasingly clear that the outbreak will have wide-reaching economic consequences.
- China's economy is forecast to grow by the smallest margin since the Great Recession - news that will hit its embattled and vulernable banking sector hard.
- The fallout is also expected to bleed into the US economy: 88% of economists predict a 0.5% hit to quarterly growth.
- Equity markets worldwide have whipsawed as investors react to new daily developments on the spread of the disease.
- But historical data from Ebola and SARS show that stocks can recover quickly after a health crisis.
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Wuhan coronavirus, the flu-like disease named for the Chinese province where it was first reported, has killed 1,380 and infected more that 64,000. Though not as deadly as global epidemics like Ebola and SARS, coronavirus' infection count is already bigger than both - combined.
Amid dire health concerns, there are also economic ones. The outbreak has already started a slowdown in China, the world's second biggest economy. And since the nation if the focal point of many crucially important global supply chains, the strife has quickly spread to other regions, including the US.
The situation has all put industries, markets, and policymakers across the world on edge as they scramble to gauge how big of a slowdown the coronavirus could ultimately cause for the global economy
Detailed below is how bad experts think it could get for China and the US, specifically. Given their positions as the world's dual economic superpowers, any negative developments for them could be downright catastrophic for the small economies that rely on them.
The worst-case scenario for China's economy
Economists predict China's economy will slow to to growth levels not seen since the 2008 financial crisis, a Reuters poll showed on Friday. The 40 economists surveyed said gross domestic product will fall to 4.5% in the first quarter, while full-year 2020 growth could be 5.5%, down from 6.1% last year.
Further, a recent report from Bloomberg found that analysts now see China GDP going as low as 3.8%. That would be an especially problematic growth rate, as it sits below 4.15% - a threshold that, when breached, would send the so-called bad loan ratio at China's biggest banks up five-fold, Bloomberg finds.
For context, in 2019 the sector saw record loan defaults and the first bank seizure in twenty years in 2019 - and that was when the economy was expanding at a much more robust 6%.
Some economist predictions are even more of the doomsday variety: Evercore ISI said last week it expects 0% growth this quarter. While it's unclear how much that figure would recover by year-end, that non-existent growth would factor into any worst-case scenario for an economy as instrumental as China's.
The worst-case scenario for the US economy
It's clear at this point that the coronavirus fallout will not just be contained to China, and Federal Reserve Chair Jerome Powell agrees. He said Tuesday that the outbreak would "very likely" impact the US economy, though he refused to speculate on how big the impact could be.
Economists recently surveyed by the Wall Street Journal were more willing to put an exact figure on the worst-case scenario for US growth. Of the 63 participants, 83% said they expect the coronavirus to result in a negative GDP hit of as much as 0.5%. Another 5% said the fallout could be worse.
Major US businesses - including Nike, Apple, and Starbucks - are already feeling the pressure. All three companies, as well as many others, shuttered some Chinese stores amid the outbreak. It's a decision that will have serious ramifications for their next quarterly earnings reports.
Beyond that, Tesla said its Gigafactory 3 plant in China was forced to remain closed during the outbreak, resulting in delayed deliveries on its Model 3 sedan. And Apple issued a "wider-than-usual revenue range" for its second quarter guidance to account for the hit.
Parallels to past pandemics
When coronavirus first hit, Wall Street economists scrambled to predict whether the outbreak could be as serious as the 2003 SARS outbreak in China. But by some measures, it's been worse.
Risk velocity - or the speed at which major risks and "black swan" events affect asset values - is more pronounced today than it was for SARS, Seema Shah, chief strategist at Principal Global Investors, said in a January client note. Globally linked supply chains, record-high market prices, and a social media culture that amplifies anxiety around risk all positioned the market for a steep drop, she said.
But no matter how deep the drop, history shows that markets rebound from health scares quickly. The S&P 500 traded up 14.59% after the SARS outbreak, and 5.34% after Ebola, according to a MarketWatch reported citing Dow Jones market data. The MSCI World Index shows that markets typically post positive returns just a single month after an outbreak, according to MarketWatch, which used data from Charles Schwab and Factset.
Ultimately, while it's constructive to brace for worst-case scenarios, Goldman Sachs - one of the world's most influential banks - says the economic impact of coronavirus will stay contained on a full-year basis.
But that doesn't mean those effects are insignificant, according to Zach Pandl, the firm's co-head of global foreign exchange and emerging-market strategy. He said in a recent note that it will take more time to fully understand the extent of the coronavirus fallout, since China doesn't announce certain key economic data until March.
His prediction: Before coronavirus is done with the economy, it will hit global growth ten times harder than a US hurricane this quarter.
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