VIRUS OUTBREAK - MARKETS AND ECONOMY SICK?

The US markets declined as fears of the deadly new virus, Coronavirus spreading globally spooked everyone. With one patient reportedly testing positive for the virus in USA, the panic is real.  

Even at Indian airports, there is now special screening for people travelling from China and Hong Kong. They have begun thermal screening at the seven airports of Chennai, Bengaluru, Hyderabad, Cochin, Delhi, Mumbai and Kolkata.

The panic is very real. We, sitting in the safe confines of our homes could feel that this is all exaggerated but its better to be safe than sorry. But why does a virus outbreak impact the stock markets?

Well, its not a cooked-up excuse; any major outbreak has major economic consequences. The virus might be contained or there might even be a cure but the fear factor plays at the forefront. The fear is the mortality.

The 2014 Ebola outbreak in Liberia pushed down the GDP even though the overall death rate in the country fell. Or can we forget the fear which was spread by SARS? People were scared to take public transport, going to work in crowded places, stayed away from shops, did not travel, no eating out, going to movies, conferences, etc. The impact from the disease was massive on the economy, but almost all of it indirect, due to the precautionary behavior of the population.

Why go that far? In 2018, when the Nipah virus broke out in Kerala, tourism received a body blow, crippling the states economy. Long after the virus was contained, people shunned the state.

The Zika Virus, remember that one? According to the World Bank Group, “Initial estimates of the short-term economic impact of the  Zika Virus epidemic for 2016 in the Latin American and the Caribbean region are a total of US$3.5 billion, or 0.06% of GDP”. The World Bank used a few factors to calculate these numbers including significant health risks and behaviors to avoid transmission, the effects of this health crisis on economic staples like tourism, loss of worker productivity, public perceptions of risk from Zika virus including media attention and possible hysteria, and the urgent action needed to be taken against the virus’s spread. And that is the real cost on the economy.

If we are to speak like a pure capitalist only, any such outbreak will benefit the pharma companies though those in tourism – airlines, hotels, tour companies will be biggest losers. Even luxury and consumer goods remain low as the fear is that people stay away from shopping and that tends to dent consumer spending.

But the impact on the markets is only immediate and limited. Its not like the impact of a war or elections, where uncertainty carries on. Like after the SARS outbreak from China in 2003, though the impact on the Chinese markets was big, it recovered within six months, making up for the losses though economy took a while longer.

China is doing its best to contain the spread of this virus but even if it did, the fear factor will remain dominant. And that is the real cost to the economy; the markets will move on….