Economic Impact of Coronavirus Will Likely Be Modest

The rapid spread of the coronavirus—rising by more than 1,000 confirmed cases per day over the last few days—has rightly alarmed the world and heightened concerns over the impact on the Chinese economy. Beijing has now taken extraordinary containment measures, including the quarantine of Wuhan, the epicenter of infection, extending the Chinese New Year holiday by three days, and restricting travel across provinces—all of which are negative for near-term growth.

It is tempting to speculate that the rapidly evolving epidemic will be hugely disruptive to the Chinese economy. This is largely driven by broad fears about the extent and lethality of the epidemic, which directly affects economic activity. Yet, a more careful analysis of the available data to date suggests that such fears may be exaggerated.

The key to this analysis hinges on having some sense of what the lethality is from this outbreak, because that will determine the appropriate response and level of concern both from officials and from the Chinese public. The situation can certainly change quickly, particularly as more data come to light and as public health officials assess conditions. But based on a close examination of the available infection figures and the mortality rate from China’s National Health Commission—data on which all sources rely—the situation may be less dire than what the widespread panic implies.

If the current situation holds steady and containment is effective over the next two to three weeks, then fears will likely abate, minimizing the impact on the economy. Of course, if this core assumption changes dramatically, then this assessment of economic impact will need to be revisited.

National Coronavirus Mortality Rate: 2% or 0.3%?

Knowing that the situation could change or the virus could mutate, according to epidemiologists, it is nonetheless instructive to examine the mortality rate to date. It has been more than a month since known infected cases, and the current national mortality rate is slightly above 2%, based on published figures. But there are reasons to believe that the headline mortality rate cannot be taken at face value and may actually be lower.

For one, once Hubei province is removed (the province’s capital Wuhan is the epicenter of the disease), the national level mortality rate drops to 0.3%, not much different from a typical flu season. Even within Hubei, the mortality rate is significantly higher in Wuhan at 5.5%, while it’s only about 1% in the rest of the province (see Figure 1).

Figure 1. Mortality Rates of Different Regions (January 28-29, 2020)Source: National Health Commission.

It is likely the case that official statistics are underreporting both the number of infected cases and the number of deaths. But the underreporting of infected cases may be more significant than that of mortality. Reported deaths have been overwhelmingly senior citizens who had preexisting conditions or other chronic ailments. Mortality among younger, normally healthy individuals has been the rare exception so far.

Although much has been made about the five million people who left Wuhan before the quarantine was imposed, it’s likely those who left are disproportionately younger individuals. For example, Wuhan has more than one million college students and nearly three million migrants, most of whom return home for the Chinese New Year. Assuming the massive exodus is mainly composed of the relatively younger population, Wuhan may be over-represented by senior citizens at the moment, which affects the mortality rate in the city.

Moreover, as the epicenter of the epidemic, Wuhan’s hospitals and doctors are severely strained. With limited capacity, hospitals are likely prioritizing and documenting severe cases that require hospitalization, while patients with milder symptoms are more likely to be missed in the statistics. If many milder, non-lethal infection cases have been omitted in the headline figures, that could also skew the mortality rate.

Given these factors—over-representation of senior citizens in Wuhan and omission of less severe cases—it seems that there is less underreporting of mortality than of infected cases overall. As a result, Wuhan’s mortality rate may be somewhat inflated at the moment, and the national figure (excluding Hubei) may be a more accurate measure of the actual mortality rate from the virus.

To put that national mortality rate of 0.3% in perspective, the eventual mortality rate of the SARS outbreak in 2003 was close to 10%, and the rate for influenza is close to 0.1%.

Economic Impact Likely More Modest than Assumed

Assuming containment is effective and the outbreak does not take a turn for the worst, then the current level of fear and uncertainty will likely soon dissipate. In what may be a small dose of good news, a credible Chinese official who led the fight on SARS suggested that the epidemic may peak in about two weeks. This estimate seems plausible given that the virus’ incubation period is around 10 days and national-level containment measures have been in place for about a week.

What this estimate implies is that in another two weeks, the number of infections will increase by eight-fold, based on the estimated pace of spread.[1] That will bring the eventual total infections to around 120,000 cases (current confirmed and suspected cases are around 15,000)—a significant figure to be sure, but represents less than 0.01% of Chinese population.

If that scenario materializes in a few weeks, then the impact on the Chinese public’s consumption patterns and other economic activities should be temporary and modest. Even if restrictive measures remain for an extended period after the peak, as fear recedes, people will be more willing to find solutions, such as remote work or shop online. Moreover, the current widespread excess capacity in the Chinese economy will help to mitigate the impact of supply disruptions as a result of transportation restrictions and the extended holiday.

In the coming weeks, Beijing will certainly look to frontload more fiscal expenditure and offer temporary tax relief in a bid to contain the outbreak and help businesses cope with the near-term fallout. But the support will likely be mild and does not change our base case of no major stimulus in the 1Q2020 outlook. In the meantime, the Chinese central bank will also provide ample liquidity to prevent a psychology of fear from freezing the financial sector, but it is unlikely to take more drastic actions such as cutting interest rates or reserve requirement ratios.

Endnotes

[1] The rapid rise of confirmed cases in recent days likely overstates the actual growth rate. Given constrained capacity and overstretched hospitals, there is a considerable lag in diagnosing and confirming cases.


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