The rapid spread of the Wuhan virus has forced economists and market participants to confront a series of questions that are almost impossible to answer. The outbreak has the potential to cause economic and market dislocations. But the scale of the impact will ultimately be determined by how the virus spreads and evolves, which is almost impossible to predict, as well as how governments respond.
At this stage, there are three useful things we can say about the potential economic and market fallout.
The first is that, while past epidemics offer some clues about the possible economic impact, the parallels are inexact. At the risk of stating the obvious, no two viruses are the same. The economic backdrop to the current Wuhan virus is also different from previous epidemics. While it’s tempting to draw comparisons to the SARS epidemic in 2003, China’s economy is now much larger and more closely integrated into global supply chains. An economic shock in China is now more likely to spread to the rest of the world.
The market backdrop is also very different. The SARS virus hit at a time when global stock markets were starting to bottom out following the bursting of the dot.com bubble. In contrast, the Wuhan virus has hit ten years into a bull market for equities. The second point to make is that the steps to contain the virus – rather than the virus itself – are causing most of the economic damage. It is therefore significant that the response by China’s government has been both faster and more extensive than was the case with SARS.
