By the time you read this it will already be about two weeks after I'm writing it. By that point we'll hopefully have a much clearer picture on what impact the coronavirus in China will have on the global economy. If it's still spreading by then, we could be in for a real significant impact on the global economy. I'm not planning to make any predictions in this post but instead I want to look at a historical example to see if there are any similarities which might give us a clue as to what impact an epidemic like this can have on the global economy and what you should do about it.
A Historical Example
Many analysts are using the outbreak of SAARS in 2003 as a benchmark for assessing how bad this crisis will be. During that outbreak more than 8000 cases were confirmed worldwide and 774 people died as a result of the outbreak. The World Bank Estimates that SARS cost the world economy about $54 Billion. However despite the superficial similarities between the two outbreaks, there are a number of significant differences.
The majority of the coronavirus infections are located in the Chinese province of Hubei, which accounts for about 4% of China's economy. In 2003 more than 2500 cases of SAARS were in Beijing, which at the time accounted for about 15% of China's economy. Clearly a much more important region economically. But on the other hand, China is now a much more important part of the global economy then it was in 2003. In 2003 China was the 6thlargest economy in the world. In 2020 it is the second largest. What happens in China today now has a much more dramatic impact on the rest of the world economically.
What is also different about the coronavirus is the disease itself. There have already been over 7900 cases of coronavirus in China which exceeds the number of cases of SAARS in 2003. The SAARS outbreak took place over 18 months so that's a much quicker infection rate for Coronavirus and that definitely makes it scarier. However, the mortality rate for coronavirus is thankfully much lower than SAARS so that will potentially lead to less of a long term impact.
During the SAARS outbreak China's economic growth rate dropped by 2% from the first quarter to the second quarter of 2003. If that were to happen today that would mean Chinese growth could be seriously lower than the current 6% rate of growth which is forecasted. The impact could even be greater because China's economy is arguably in a more fragile state at the moment, then it was in 2003. China is just starting to recover from the effects of the trade war with the US in 2019. The economy was showing signs of revival but now the virus will likely set them back.
Many Chinese cities are completely closed for businesses for the next week or two, so production is definitely going to take a hit during this period. In addition consumption is a much more important part of the Chinese economy now and Chinese consumers will not be venturing out to go to restaurants, see a movie, or to go shopping while the epidemic is still going on, so that is likely to have an impact on consumption.
The timing of this outbreak is also not good as it's taking place during China's Lunar New Year holiday period when hundreds of millions of Chinese normally travel to be with their families. This movement is problematic because travel has been restricted for many people, but also because millions more will still be travelling and will potentially carry the virus with them.
So I think it's clear that we just don't really know what the extent of the impact will be. It appears to me that using the 2003 outbreak of SAARS may provide us some idea of a benchmark, but realistically I think the situation is too different to really think that the SAARS outbreak provides an accurate prediction of how this crisis will play out.
However, that does not mean that all is lost! We consistently preach a long term mindset to our clients and this situation is no different. Outbreaks like these do end, and when they do, the economies that they've effected will recover. In fact, growth coming out of a crisis like this may even be extra strong as consumers have saved some money by not spending during the crisis period.
Two of the companies that we own in China could actually be beneficiaries from the illness. Alibaba is a large e-commerce business. If people are unwilling to leave their homes to shop, that means they will likely make more purchases online. Once they become more accustomed to shopping online, they may be less likely to go back to the old style shopping of actually going to the store. That could present long term growth opportunities for Alibaba.
Tencent owns the super app WeChat which is used by the vast majority of Chinese people to communicate with each other. People don't really text in China, they send WeChat messages. During this crisis, people have been largely relying on WeChat to communicate with their friends and relatives. This could also lead to long term growth for Tencent if those users continue to use WeChat.
So, there is even some silver lining in a crisis like this for investors. For the sake of the people involved, I certainly hope that the disease is contained quickly. I think that's an outcome we can all agree on and hope for.
- Craig White, BA, LL.B., CIM
Craig White is an Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Craig White an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.
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