A lot can be thought and said about the virus outbreak in Wuhan, but of course, first would be sympathy for the people who are affected by the virus outbreak in one way or another.
In this context, the considerations in the financial markets will very quickly feel like a cool contrast to the consequences for many of the people affected by the virus.
In the financial markets, it is the cool rational considerations of the economic consequences of such a virus outbreak that applies – from China’s overall economy, to a corporation in a country on the other side of the earth.
Based on data from 2018, Hubei represents four percent of China’s overall economy and the province’s GDP growth was at 6.6 percent. According to the latest estimates, the population of Wuhan is approximately 7.5 million, making it China’s sixth largest city.
The current situation is not only that Wuhan is closed to inbound and outbound traffic, but so are a number of other cities in Hubei.
In total, approximately 50 million people in the Hubei province alone, are affected by the coronavirus – understood in the way that they cannot move in and out of the cities where they live.
These are quite significant measures to counteract the spread of the virus. If one imagines that this situation will continue for a while, or worsen, then it will certainly have an impact on Hubei’s economy, but also China’s economy as a whole.
I estimate that China’s economy is currently growing by six percent per year and Hubei’s economic growth rate roughly follows China’s average. A serious situation in Hubei could mean that half of the GDP growth will disappear in this first quarter, which will also have a negative effect on surrounding provinces, where I judge that a similar sum of growth would disappear, in case the gravity of the situation continues.
If China’s total growth this year is expected to be six percent, then an unexpectedly serious situation in Hubei will mean that China’s total GDP growth in 2020 will decrease from 6 to 5.94 percent, which is hardly measurable. Before Hubei’s direct impact becomes noticeable for China’s overall GDP growth this year, it is my assessment, that Hubei’s overall economy should be at a standstill for approximately 1½ months, which is not realistic.
The total car production in Hubei is 1.6 million passenger cars per year, which is a large number, but all numbers in China are large, and as mentioned, the 1.6 million cars only represents six percent of China’s total car production.
It also falls in line with the Hubei province “only” accounts for four percent of the overall Chinese economy, and that is why I argue that the coronavirus must spread seriously before the virus outbreak itself hits China’s economy hard.
But the many precautions that are being taken and those that are extremely significant, will be noticeable for the growth in China within a few weeks’ time. In addition, the entire travel industry in Asia might soon suffer, and it’s possible that Hong Kong’s economy will be hit again.
As the coronavirus continues to spread, which may well be the case for yet another week or two, the nervousness, also among investors, will most likely be maintained for another week, at minimum. However, in view of the immediate negative economic consequences and the spread of the virus so far, it is my assessment that the stock market has already priced in a large risk premium.
Concerning the movements in the global stock market, I interpret the steepness in the price drops as an indication of a current overbought situation, where many events could have provoked a downwards correction.
I understand that Chinese investors fear that domestic consumers will spend less due to the virus outbreak. But on a global level I do not believe the risk for a global consumption slump is relevant yet, and I still don’t worry if investors should sell the global stock market a handful of percent further down.