Coronavirus: How bad can it get?
The coronavirus outbreak in Wuhan, China, has gone from a niche story to a major pandemic threat in just a few days. We know little about the current coronavirus variant except that the virus likely emanated from animals. Given that about 1.2% of all bats in China are infected by coronaviruses and 3.6% of bats are infected by Paramyxoviruses (both have the potential to harm humans), it is no surprise that there are regularly cases when these viruses mutate into something that can cause severe illnesses and even death in humans. Ironically, it was only two years ago that researchers managed to pinpoint the origin of the SARS pandemic. It was a cave in Yunnan province a mere kilometre away from the nearest village which prompted the scientists to warn that another deadly outbreak could emerge at any time. Two years later, their warnings seem to have become reality. But China isn’t the only pandemic hotspot in the world. The map below shows that the Indian subcontinent and central Europe also have a high likelihood to be the centre of a new pandemic outbreak from wildlife.
Hotspots map of emerging infectious diseases from wildlife
Source: Chmura (2017).
The social cost of such pandemics is impossible to calculate. After all, what is a life worth and what is the cost of putting an entire city into quarantine as China has done in Wuhan? However, as investors we can try to identify the likely economic costs of pandemics. And coronavirus-related pandemics like SARS, the Avian Flu (H5N1) and the Swine Flu (H1N1) all cost the global economy in excess of $30 billion.
Estimated cost of pandemics
Source: Chmura (2017).
The example of SARS is probably a good guidance for the possible economic impact of the current coronavirus outbreak. We can’t be sure but it seems as if the current coronavirus pandemic spreads faster than SARS but is less deadly (see table at the end of this post for a comparison of different coronavirus pandemics). This means that the economic impact will likely be felt not only regionally in China and neighbouring countries as was the case for SARS but also in developed countries in the West. On the other hand, the countries that are affected by the pandemic will likely suffer lower direct damages from loss of life and loss of productivity due to workers being sick.
But that is only a mild consolation. The immediate effect of the pandemic is felt by airlines and the tourism industry as flights are cancelled and tourists stay away from affected countries. Since the current outbreak happened right at the beginning of Chinese New Year, which is a peak travel season, tourism to and from China as well as intra-Chinese trips will likely take a massive hit. During the SARS pandemic, passenger volumes in China, Hong Kong and Singapore dropped by two thirds or more. The knock-on effects are felt in the tourism industry overall and in retail and food services industry more generally. An interesting case study on the impact of the MERS virus in 2015 on Korea has been published by Heesoo Joo and his colleagues who showed that although Korea is a highly developed country far from the centre of the MERS outbreak, the virus spread quickly to Korea and caused significant economic damage. Once it was known that Korea was affected, the tourism industry took a hit. In the end the cost of MERS to the Korean tourism industry was estimated to be $2.6 billion or about 0.17% of GDP.
Reductions in international passenger arrivals during the SARS pandemic
Source: Noy and Shields (2019).
The cost of MERS to the Korean economy is roughly in line with the estimated direct costs of the SARS pandemic on developed Asian economies. Direct plus indirect effects (e.g. loss of GDP due to sickness leaves of workers, reduction in educational attainment due to temporary school closures etc.) cost the Korean economy about 0.1% during the SARS pandemic. The United States economy likely suffered costs of c. 0.05% of GDP. And both countries were hardly affected by SARS and have diversified economies that do not depend heavily on tourism. Countries that were hit directly by SARS experienced losses between 0.5% and 2.5% of GDP. In a hypothetical scenario where the SARS pandemic would not be just a temporary shock but lingered on for another 10 years, the economic impact could be even higher as the chart below shows.
Estimated economic impact of SARS pandemic
Source: Lee and McKibbin (2004).
At the moment, we are far from this extreme scenario, but it seems clear that the Chinese economy will likely experience a substantial decline in output due to the current pandemic. If other countries will experience significant economic losses depends mostly on how deadly the current pandemic will be (the more people die, the bigger the impact on the tourism industry), how fast it spreads to other countries and within large countries like the United States, and if it can be contained quickly. Remember that today there is still no known treatment for SARS. All we can do is help patients with antiviral treatments to reduce inflammation of the lungs and isolate them so they cannot infect other people. And then we just have to wait and let the pandemic run its course.
The current coronavirus pandemic in perspective
Source: NPR.