Do the Markets Underestimate the Aftermatch of Coronavirus?

According to the updates from Chinese health officials, the death toll of coronavirus has risen to 132 and the infection cases already surpassed the confirmed cases of SARS in China in 2002 – 2003.   

The analysts alerted the caution on markets not to underestimate the potential fallout of the virus outbreak, whether it could have a result like “Lehman Brother case” on the global economy during the late 2000s.

Several market analysts pointed to the 2003 SARS outbreak as an indication of the short-term nature of any potential economic fallout. The Chinese growth rate was estimated to reduce 1%, while an overall East Asia growth was cut off 0.5%, and after the summer of 2003, developing Asia recovered at an 11% GDP growth which could infer that the effects were somewhat short-lived

The major difference between 2003 outbreak and the epidemic of coronavirus is the scale and significance of Chinese economy in the global stage.

On 2002, Chinese GDP was at around $1.5 trillion or 4% of global GDP, while by the end of 2019 the GDP rose to $14.3 trillion or over 16% of global GDP. In addition, there were 60% lived in rural in 2003 meanwhile, now about 60% live in urban area. The number of air travelling jumped from 80 million to 660 million.

AdMacro Head of Research Patrick Perret-Green told CNBC Tuesday that the markets were being “far too casual” given the growth of China’s economy since 2003, along with the increase in its urban population and accessibility of travel.

“The coronavirus outbreak represented a “Lehman-type moment tipping point” which could “tip the global economy into effective recession.” Perret-Green added.

“If the WHO (World Health Organization) is correct and the virus impacts for months, it doesn’t seem unreasonable that it could knock at least 1% off China’s growth and 0.5% off global growth,” Perret-Green published a note on Friday.

“Indeed, we believe that it could be much greater than that. Such is China’s interconnectivity with the global economy. With global growth set to remain weak — the World Bank is forecasting only 2.5% this year — it’s not inconceivable that China could tip the global economy into an effective recession.”

Neil Mackinnon, global macro strategist at VTB Capital stated that “China is now on a medium-term slower growth trajectory as it makes the transition to a consumer and services-led economy, while at the same time it tries to deleverage its high debt-GDP ratio.”

“The point for equity investors is that the economic and financial risks are tilted to the downside, even though everyone rightly hopes that the coronavirus remains a short-term event that is treatable and containable,” he concluded.