COVID-19 - Is It A Black-Swan Event?
Indian Economy & Market|March 2020
It often happens that, the thought of fear itself is greater than what it is we fear. The stock market is currently experiencing the same. It is feared that deadly Coronavirus could tip the world economy into recession. The correct assessment of the impact would be difficult now as situation is quite fluid. The emergence of new centers of infection outside of China is fueling concern that the outbreak could become a global pandemic, rattling financial markets. Nevertheless, it presents an opportunity to India. The current software industry in India is also a product of similar opportunity presented in year 1998 due to Y2K problem.

Indian investors have lost almost ₹11 lakh crore in five trading session ending February 28, 2020. What has led to such sharp fall in the market cap is the fear of Coronavirus, which is moving fast to become a pandemic as it is spreading its wings beyond China; globally 50 countries have reported cases till February 28, 2020. Besides, various Asian countries such as Iran and South Korea are also badly hit. While there were indications that the outbreak may be slowing in China, but France and Germany reported upticks in infections and South Korea’s tally surpassed 2,300. This pandemic could tip the world economy into recession and equity markets are on track since the financial crisis that began in 2008.

What History Suggests: SARS

This is not the first time that China is facing such problem. Way back in November 2002, severe acute respiratory syndrome (SARS) began spreading rapidly around the world, which was started in China. The outbreak of SARS had infected more than 5,300 people and killed 349 in China. The current situation is much worrisome as more than 2800 people have died so far with confirmed cases now well above 78,000.

What happened in past will give us a sense of what we can expect going ahead. Nevertheless, it should be adjusted for various factors such as size of the economy, growth rate and most importantly how interconnected it is now. The impact of SARS was most acute in the second and third quarters of year 2003, which resulted in the fall of GDP growth by almost two per cent in nominal terms. The Chinese economy slowed down from 13.4 per cent in the second quarter to 11.5 per cent in the third quarter. Looking at the sheer magnitude of the Coronavirus, the impact would be much higher on the Chinese economy. Moreover, this virus has hit at a time when the economic activity in country was supposed to be at its peak due to Chinese New Year. Even at that time China saw foreign tourism revenue fall as much as 60 per cent and the number of visitors dropped by 60 per at the height of the crisis. Since SARS, international tourism by Chinese nationals has boomed. For example, they account for only 5 per cent of total tourist in US, however they account for 11 per cent spend. So the Coronavirus will impact not only China but the entire global economy. The deadly epidemic could put an already fragile global economy recovery at risk, the IMF warned, as G20 financial chiefs discussed ways to contain its economic ripple effects.

The outbreak has the potential to shave about 0.1 percentage points from global growth.

While estimates vary, economists believe SARS cost the global economy about USD 40 billion. The SARS outbreak saw nearly 8,100 cases globally, with 774 deaths, meaning nearly 1 in 10 people who were infected died. With more than 2800 deaths alone in China and more than 80,000 worldwide Coronavirus cases, we believe this time the impact will be much severe. Moreover, economists are expecting a far greater impact on the global economy, largely because China’s economy has grown to be the second biggest behind the U.S. since its sixth-place ranking during SARS.

Last time, after SARS it was sharp recovery for the Chinese economy, nevertheless, experts are still struggling to gauge the right figure, whether it is ‘V’, ‘W’ or ‘U’. Given the uncertainty around the spread of the virus it would be very difficult to ascertain the right word of recovery.

Impact on Chinese economy

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COVID-19 - Is It A Black-Swan Event?

It often happens that, the thought of fear itself is greater than what it is we fear. The stock market is currently experiencing the same. It is feared that deadly Coronavirus could tip the world economy into recession. The correct assessment of the impact would be difficult now as situation is quite fluid. The emergence of new centers of infection outside of China is fueling concern that the outbreak could become a global pandemic, rattling financial markets. Nevertheless, it presents an opportunity to India. The current software industry in India is also a product of similar opportunity presented in year 1998 due to Y2K problem.

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