RUTH SUNDERLAND: Global markets will ride out the coronavirus crisis
- Global stock markets have fallen to their worst levels since 2016
- China’s supply chain dominance makes the epidemic more problematic than SARs, as China only accounted for 5% of world economy in 2003
- Markets will bounce back but investors will have to be patient
The recent stock market falls have been the worst since the financial crisis and, just as then, we are in new and sobering territory.
Markets and economies will be affected not only by the spread of coronavirus but also by the responses to it.
Clearly, there are risks in medical and human terms to under-reacting to the virus. But there are also perils in over-reacting.
Residents in Hong Kong wearing protective masks as fears about coronavirus spread
Any unnecessary lockdowns and quarantines would be expensive and highly socially disruptive, and that also has human costs.
The Centre for Economic and Business Research today points out that if London went into lockdown – thankfully, it views this as an unlikely scenario – the capital’s output would fall by £2.4billion in a week.
As London is responsible for a fifth of the UK economy, the entire country would face a financial nightmare.
The only clues we have are to look at what has happened to economies in pandemics of the past.
Spanish flu, which caused around 50 million deaths in 1918/19, after being spread by soldiers returning from the First World War, was the worst infectious catastrophe since the Black Death.
It hit the world economy by around 5 per cent, according to Capital Economics. Asian flu in 1957/58 caused more than a million deaths worldwide and had a lesser effect, shrinking the world economy by around 3 per cent.
The more recent SARS outbreak in 2003 killed 774 and knocked just 0.1 per cent off global GDP.
It is too early to say where coronavirus might rank in this grim history. And these past episodes are limited as a guide since both medicine and economies have evolved rapidly, as has the media and communications.
Medical advances and general improvements in public health and living standards may have put the world in a better place to combat the health consequences of a pandemic, but, due to globalisation, the economic costs could be greater.
People, goods and capital now travel widely with few barriers. Supply chains are often long and complex. Businesses from car makers to pharmaceutical companies rely on components and ingredients being able to pass quickly and easily across borders.
Services are a bigger part of the global economy, so if people avoid public places such as restaurants, it will have a greater impact than in the past.
Most significant, the role and status of China has changed dramatically.
At the time of SARS 17 years ago, it accounted for just 5 per cent of the world economy. It had only just become a member of the World Trade Organisation in 2001 and its position at the centre of supply chains was in its infancy.
Now it is the world’s second-largest economy and at some point – perhaps later than previously forecast due to the virus – is expected to be the largest.
The other major difference between this outbreak and its predecessors is social media and instant news, which could be hugely beneficial in giving the public rapid information about health measures and hotspots to avoid, but also has the capacity to inflame and magnify panic.
The problem for policymakers is that the usual remedies – cutting interest rates or printing money – don’t work on supply shocks.
If cities are in lockdown, factories idle and restaurants empty, lower borrowing costs and increased liquidity in the system won’t help.
As for the carnage on the stock markets, seeing such steep declines is worrying for small savers. But in the long run, as research just out from Credit Suisse shows, shares are by a margin the best investment.
Markets bounce back, given enough time. In the short term, though, there is more pain to come.