Originating in Wuhan, China, the coronavirus epidemic has headlined international news for the better part of the last two months. Global health concerns over the spread of the virus have been especially heightened with the presence of Lunar New Year celebrations, the virus’s long incubation period, and the fact that Wuhan is a major transportation hub on the national and international scale. Most recently, the implications of the coronavirus are becoming most apparent in global markets. The Dow Jones Industrial was down nearly 600 points Friday before market close, the worst day since August of 2019. But why does an apparent human health concern affect something like the market? The answer lies in its effect on gross domestic product, or GDP. This article will breakdown the numerous streams of causation leading into the ultimate decline in global markets, all starting with the coronavirus.
Here are some baseline statistics from the World Health Organization (WHO) that will help you better understand its magnitude on the global scale (as of February 2nd, 2020):
- Globally 14557 confirmed cases
- China 14411 confirmed cases
- 304 deaths in China, 1 death in the Philippines
- Outside of China, 146 confirmed cases in 23 countries
These statistics demonstrate the massive proliferation of the coronavirus on a global scale. They show the coronavirus’s potential to disrupt global economic growth as it continues to spread further.
Implications on GDP
GDP is the total value of goods and services produced in a country during a period of time. If you’ve taken macroeconomics, you’ll know that GDP is comprised of four core components: consumer spending, capital investment, government spending, and net exports. Furthermore, global markets are heavily tied to the growth or decrease in global GDP. Therefore, the primary reason why coronavirus has sparked a decline in all global markets is its negative impact on all four elements of GDP. Let’s break down the impacts that coronavirus has on the four components of GDP to better understand its ramifications on the global economy.
According to the Organisation for Economic Co-operation and Development (OECD), consumer spending accounts for about 60% of global GDP, easily making it the most important factor in GDP increases and decreases. Consequently, the coronavirus’s impact on consumers plays a devastating role in stunting GDP on the local and global scale. This connection is simpler than you may think. Quarantines implemented to stop the spread of the coronavirus prevent consumers from going out to spend their money on anything from tourism to groceries. People can’t work, preventing them from providing usual services that require consumer spending. Thus, the coronavirus essentially freezes consumer spending in the countries it affects.
Another critical aspect of GDP, investment is significantly deterred by the presence of a global outbreak, especially in the country from which the outbreak originates. On market open, the Dow Jones Shanghai Index dropped 11%, a ridiculous falloff caused solely by the coronavirus. Drops like these, albeit smaller ones, have been seen across global markets for the last month or so. This is due to the high degree of instability and uncertainty the coronavirus brings to the function of the global economy. Specific sectors, such as the industrial sector, are deeply affected by the withdrawal of capital by investors, as a lack of capital prevents future growth. Until the coronavirus demonstrates a decline in its trajectory as a contagion, investors will continue to withhold investments in order to protect their money.
GDP has a positive correlation with government spending, meaning an increase in government spending leads to an increase in GDP. The coronavirus affects this aspect of GDP differently than the other three components. The coronavirus simply influences the government to spend more in order to counteract declines in the other three aspects of GDP. China plans to inject $174 billion of liquidity into the market following the market open on February 3rd. This step taken by the Chinese government demonstrates their urgency to stop the descent of Chinese markets as coronavirus continues to ravage China.
While not traditionally a major component of GDP, net exports are an integral part of the Chinese economy. Because of China’s heavy reliance on exporting goods, the coronavirus hits this part of the Chinese GDP much worse than other countries. One industry that has taken a beating is the oil industry. The Brent Crude Oil Benchmark I (^SGICBRB) has fallen a staggering 18.1% since the beginning of January because of the decrease in demand for oil in China as all transportation and industry screeches to a halt. Furthermore, emerging markets reliant on trade with China are yet another victim to the spread of coronavirus. The MSCI Emerging Markets ETF (EEM), has declined approximately 9% since January 17th, which demonstrates the butterfly effect of the coronavirus across the globe.
The coronavirus will continue to disrupt the global economy until it begins to die off or a vaccine develops. However, this possibility is unlikely. New travel restrictions rolled out by the US to combat the virus will only contribute to the global slowdown in the near future. Despite the seemingly dire situation, the coronavirus is not anything new for the world. Previous epidemics such as Ebola and SARS in the last two decades have had similar characteristics to the coronavirus outbreak, yet we still managed to pull through. Given enough time, the coronavirus will eventually die off, and markets will inevitably rebound as stability returns. However, in the meantime, the virus will continue making markets incredibly volatile, discouraging investors, and upsetting the global economy.
Unless specified, data from finance.yahoo.com