Following the outbreak of the Coronavirus, there have been a plethora of reports comparing it to SARS (severe acute respiratory syndrome). It is only logical to compare SARS and the Coronavirus as there are plenty of similarities between the two. For investors, it is important to know the financial impact that SARS had, as this would help them better manage their portfolio, given the uncertainty surrounding the coronavirus.
In 2003, SARS infected over 8000 people and killed 774 people. Asia was hit the hardest, with Hong Kong registering about 300 deaths. SARS had a fatality rate of 9.6%.
In comparison, on Feb 5, there were about 5300 new cases of the coronavirus. Further, as per a report from Cowen, new confirmed cases dropped marginally from 3.9k to 3.7k. In terms of the mortality rate, the report says the new virus with 564 confirmed deaths already has a mortality rate of 2% so far.
“564 confirmed deaths, including 562 in Mainland China and 549 of them in Hubei. Reported mortality is 2.8% in Hubei and 0.1% in other provinces,” Cowen analysts say.
For the coronavirus, the fatality rate has remained steady for the past couple of weeks. However, it could go up as the death toll rises. Moreover, the virus seems to have an incubation period of up to 14 days. So, there are good chances of the fatality rate going up yet.
Hubei, the epicenter of the virus, accounts for about 70% of cumulative confirmed cases in China. Outside Hubei or in other regions in the country, the growth has been relatively steady. Talking of outside China, so far, 99% of the confirmed cases are from Mainland China compared to 66% of cases for SARS.
Nomura analysts cite two primary reasons why the financial impact of the coronavirus could be bigger than SARS. First, the coronavirus itself could be much bigger than SARS. Second, the timing of the outbreak around the lunar new year (LNY) holiday.
We have already discussed why the coronavirus could be bigger than SARS in terms of spread. Talking of the inopportune timing, the deadly virus accelerated around Jan. 20, or just before the LNY holidays. In comparison, the SARS outbreak accelerated in March 2003, after the LNY travel rush.
It is possible that the surge in the number of cases was due to people returning to home towns before or after the lunar new year. Though the holiday was extended, people are expected to get out of their homes for work.
“…we believe the risk of further contagion should not be underestimated, as traffic flows will soon rise again as individuals start to leave their hometowns and return to work, especially in provinces and regions with a heavy reliance on migrant workers,” Nomura says.
The financial impact of the coronavirus would also be more because its epicenter is Wuhan, the capital city of the inland Hubei province. It is the biggest city of Central China and one of the nine Chinese mega-cities.
“Due to its location and advanced transportation facilities, Wuhan is an important, comprehensive transport hub in China…,” Nomura says.
In comparison, the SARS outbreak originated in Heyuan, which is a small city in the coastal Guangdong province.
Reasons for bigger financial impact
Talking of the impact on the Chinese economy, the 2002-03 SARS outbreak pushed the real GDP down by 2pp from the first quarter to the second quarter of 2003. Due to the coronavirus, Nomura expects a bigger than 2pp drop in the GDP growth this quarter owing to a number of reasons:
- China’s service sector is now much bigger than what it was during the SARS outbreak. The sector accounted for about 53% of China’s real GDP in 2019. The services sector was hit the hardest during SARS, and the same is expected this time as well.
- Chine extended the LNY holiday to Feb. 2. But, many regions, including major manufacturing hubs (Shanghai, Zhejiang, Jiangsu, Guangdong and Fujian) have asked the companies to suspend all operations till Feb. 9. As per the estimates from Nomura, total contributions of these regions to the GDP were more than 90% last year.
- China has locked down several cities and villages. This itself would have a significant impact on the economy. Production and investment in Hubei, which comprised 4.3% of the national GDP in 2019, has been majorly affected.
- Disruption of the transportation network would further affect production.
- After migrant workers return to work, companies will need to spend more time and money to limit the spread of the virus.
All these factors could have a bigger impact on the Chinese economy now than about 20 years ago. At the time of the SARS outbreak, China was experiencing robust growth due to “strong exports and capital inflows after its WTO accession, but we see more growth headwinds in 2020, especially from the cooling property sector and worsening fiscal conditions.” Nomura says.
Impact on global economy
Coronavirus is certainly much more contagious than SARS, but it may be less lethal (for now). Based on the actions of the Chinese government, including the lockdown of certain cities and numerous villages, it is quite clear that the virus would have a bigger financial impact on China’s economy than SARS.
Moreover, since China is now more integrated with the global economy, other countries would also feel more of a financial impact from the coronavirus, compared to SARS. In 2019, China accounted for about 19% of global trade.
A recent report from Nomura believes markets are “significantly underestimating” the potential financial impact of the coronavirus. Given the size of the Chinese economy (19.3% by purchasing power parity in 2019) and its integration with the global economy, Nomura analysts believe the “current market response and estimates of the economic impact” of the virus “underappreciate the risk.”
