Wuhan Coronavirus Could Be Worse Than SARS For China’s Economy

The outbreak of a new respiratory virus in China is likely damaging for a Chinese economy struggling to bounce back after experiencing its slowest growth in decades.

The extent of the economic drag from the coronavirus will not be known for some time but analysts are looking at the 2003 outbreak of severe acute respiratory syndrome, or SARS, for clues–and many are concluding that the impact of this year’s outbreak could be worse.

The timing of the outbreak is particularly inauspicious. China is just days away from Lundar New Year celebrations, a time when millions of Chinese typically travel to their familial hometowns, gather for parades, eat out, go to the movies, and shop. Last year, Chinese people spent around $150 billion on restaurants and shopping over the week-long holiday, according to official figures. Spending on domestic travel and tourism for the holiday was around $118 billion.

That raises the possibility of the virus spreading quickly. This could be avoided through travel restrictions and consumer decisions to stay home but at a potentially very high economic cost. During 2003 epidemic, growth in retail sales plummeted by about half.

China’s consumer spending and services sector are now much bigger, which in most circumstances is a good thing. But it makes the country far more vulnerable to a downturn in consumer spending. And travel and tourism account for 5 percent of GDP, up from around 2 percent in 2003.

“China’s economy is therefore more exposed now than when SARS hit. The key will be how quickly authorities are able to bring the infection’s spread under control,” Nathaniel Taplin wrote recently in the Wall Street Journal‘s influential “Heard on the Street” column.

Global oil prices have fallen on concerns that the virus could dampen demand. Analysts at Goldman Sachs have forecast the outbreak lowering demand for oil by around 300,000 barrels a day, worth about $3 off the global price, according to the Financial Times.

China is also more urbanized than it was in 2003–and dependent on the spending of urban households. That makes it easier for the virus to spread and could heighten the economic impact.
If Chinese consumers decide to shelter in place, the effects would likely be felt beyond China’s borders, diminishing demand for foreign goods at a politically sensitive time when China is attempting to ramp up its purchases of U.S. products.

The good news is that Chinese authorities, after initially being slow to react, now seem to be taking the threat from the virus seriously. It also appears to be less virulent than SARS, although that could change as the virus mutates.