Mumbai/Hong Kong/Washington: A glimmer of hope for recovery in global growth this year after the US and China reached a temporary truce in their trade war seems likely to be derailed as the deadly coronavirus quickly spread to 19 countries and now threatens to escalate further.

Investors around the world rushed to dump equities and flocked to safer havens, fearing that the coronavirus could slow down global growth.

The outbreak that began in the central Chinese city of Wuhan has killed 107 people in China and infected more than 4,500 globally. The World Health Organization called the outbreak an emergency for China, but stopped short of designating it a global emergency.

“The Wuhan coronavirus poses a significant downside risk to the near-term Asia-Pacific economic outlook in 2020 if the epidemic continues to escalate in coming weeks," Rajiv Biswas, Asia-Pacific chief economist at IHS Markit, wrote in a recent report to clients. “The extent and duration of this negative shock to regional economic growth will depend on how quickly the Wuhan virus epidemic can be brought under control."

The MSCI World index, which captures large and mid-cap representation across 23 developed markets, has fallen 1.3% in the past 10 days. The sell-off has been sharper in the MSCI Emerging Markets index, which shed 3.57%, while India’s benchmark Sensex lost nearly 2% during the period. On Tuesday, the Sensex fell 0.46% to 40,966.86 points.

According to analysts, investors in India have reacted to the concerns related to coronavirus as well as worries about fiscal slippages.

“Though Indian markets have declined in tandem with global peers, Union budget will steer equities ahead. Any unfavourable announcement in the budget may deter sentiment and result in some sell-off," said an analyst on condition of anonymity.

On Tuesday, Chinese President Xi Jinping assured that the country was confident of defeating the “devil" of coronavirus. Yet, despite his confidence, international alarm was rising. Governments across the world, including India, are preparing to evacuate their citizens.

Companies including Honda Motor Co. Ltd and Nissan Motor Co. Ltd are evacuating workers from the affected area, while theme park operators, movie theatres, retailers and restaurant chains are suspending or curtailing operations to protect workers.

While it is too early to assess the full impact on China, where national holidays have been extended and the central city of Wuhan has been locked down, it is clear the virus is hurting consumption and tourism. The city of 11 million has been locked down in a bid to stem the spread of the virus, leaving roads empty and millions of people isolated and idle.

Economists are still running the numbers on how that will hurt economic growth. Many are benchmarking the spread and severity of the coronavirus against the SARS (Severe Acute Respiratory Syndrome) outbreak in early 2003.

WHO has called the outbreak an emergency for China, but stopped short of designating it a global emergency (Graphic: Sarvesh Kumar Sharma/Mint)
WHO has called the outbreak an emergency for China, but stopped short of designating it a global emergency (Graphic: Sarvesh Kumar Sharma/Mint)

During the SARS crisis, close to 800 people in 17 countries died of the previously unknown respiratory illness that originated in southern China.

During SARS, Asia-Pacific airlines lost 39 billion revenue passenger kilometres or around 8% of annual traffic in 2003, according to the International Air Transport Association (IATA). Global cost from SARS was estimated at $33 billion, or 0.1% of world GDP in 2003.

Damage to the economies of China and Hong Kong was pegged between 1% and 3%, while total East Asian losses were estimated at $20 billion.

However, while this forms a good starting point—both occurred around the Chinese New Year which sees the biggest migration on the planet—there are significant differences, including the fact that the US was coming out of recession and about to invade Iraq in early 2003.

The impact on financial markets was, in general, relatively small in 2003, with movements in the first half of 2003 hard to disentangle from Gulf War II. That said, when prices did react, the moves were generally sharp but short-lived.

According to Macquarie, the SARS outbreak had a large short-term impact on the Chinese/Asian economy (the hit lasted around three months), but less of an impact at a global level. “In the current episode, however, while the impact is once again likely to be concentrated on Asian consumption (travel will be hard hit), the increased importance of the Chinese economy suggests a bigger global drag," it said in a note on 28 January.

“The downside is that China is now much more important to the global economy and more integrated than in 2003: its GDP share is up from 4.3% to 16.3%; the number of Chinese travelling abroad increased from 16.6 million in 2002 to 162 million in 2018; and its role in commodity markets is far bigger," said Macquarie.

Earlier this month, the International Monetary Fund predicted the world economy would strengthen in 2020, albeit at a slightly weaker pace than previously anticipated, with support coming from a pick-up in manufacturing, trade and signs of a revival in the electronics industry.

Whether that happens now hinges, at least partly, on the severity of the outbreak, how long it lasts and how effective governments are in rolling out stimulus to offset the hit to growth.

Reuters contributed to the story.

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