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Will the Coronavirus Cause an Economic Recession?

Will the Coronavirus Cause an Economic Recession?

As news regarding the coronavirus continues to worsen, at which point should we consider the fact that a global economic recession is a possibility?

There is no arguing that conversation surrounding the coronavirus is not looking good. Current figures from the Chinese government report over 70,000 infected, and more than 1,700 dead. There have also been 4 deaths outside of China.

Things only worsened after Chinese authorities changed what counts as a positive infection, and the number of cases jumped by an additional 13,000, as they were retroactively reported. Regardless of how you look at it, the news is not positive.

With no cure yet to be found, and around 10% of the world’s population under quarantine, there has undoubtedly been an impact on the Chinese economy, and by extension, the global economy.

Estimates say China is currently running at 40-50% capacity, with much of the country in lockdown, and people are unable to leave their homes. As a result, tourism is down, production is down, and consumption is down.

Image taken from Bloomberg Graphics

One of the easiest ways to measure and predict the impact the 2019 coronavirus will have on the global economy is to compare it to another coronavirus which struck China, albeit almost 20 years ago, SARS.

Compared to SARS, coronavirus is more infectious, but less deadly. However, the number of those both infected and dead from coronavirus has surpassed that of SARS epidemic from 2002-2003.

SARS lasted 8 months, and resulted in 8,098 cases and 774 deaths, a nearly 10% fatality rate. By comparison, the coronavirus currently has a 2% fatality rate, but has resulted in more deaths.

SARS most definitely did not cause an economic recession, but it did result in an estimated 0.5-1% dent in China’s growth rate for 2003. However, at that time China was only the 6th largest economy in the world. It mostly produced only cheap goods and labour. But now China is only behind the US in terms of GDP and has gone from simply producing t-shirts to being leading manufacturers of smartphones and vehicles. Major tech giants such as Apple and Amazon, as well as car manufacturing plants, have all had to shut down their factories for the time being. Flights into China from dozens of major airlines have also been cancelled.

As well as this, China has a lot more buying power now, with a newly emerged middle class that likes to spend its money on travelling, expensive fashion brands, and consumer gadgets.

It is a testament to China’s economic power that it is capable of causing a global economic slowdown.

If the coronavirus outbreak is still able to be contained now, then the damage done to the global economy will still just be fleeting. A hit in the first quarter for China’s, and by extension the global economy is undesired but still manageable.

However, due to the size of China’s economy and the impact it has on the global economy as a result, combined with other factors such as the fact that a cure has yet to be found, an economic recession could very well be in the cards if the virus continues its rampage. There's no tell just how long it will last, and how much damage it will ultimately do, but as long as it continues, global economic damage will only continue to scale as well.