Jenny Harrington, Gilman Hill Asset Management CEO and portfolio manager, and Shannon Saccocia, Boston Private Wealth CIO, join CNBC's "Fast Money Halftime Report" team to discuss the impact of the coronavirus and the potential slowdown in the China GDP on stocks. Markets are underestimating the potential fallout of the coronavirus outbreak, which could be a “Lehman-type” moment for the global economy, according to economic research firm AdMacro.
Chinese officials on Tuesday confirmed that the death toll from the virus, which originated in the city of Wuhan, had reached 106 with 4,515 people infected.
Global equity markets sold off sharply on Monday, but began to stabilize on Tuesday, with stocks still hovering close to recent record highs. Many market analysts have pointed to the 2003 SARS outbreak as an indication of the short-term nature of any potential economic fallout.
SARS affected around 8,000 people and resulted in nearly 800 fatalities, and was estimated to have reduced growth in China in 2003 by 1 percentage point while trimming 0.5 percentage point off growth across East Asia.
However, AdMacro Head of Research Patrick Perret-Green told CNBC Tuesday that the markets were being “far too casual” given the growth of China’s economy since 2003, along with the increase in its urban population and accessibility of travel.
With 60% of China’s population now in urban areas, compared to 60% rural in 2003, and passenger journeys by air increasing to 660 million from 80 million, he suggested that the cost of shutting down huge cities had not been properly priced in.
“Xinjiang province, 56 million people where enterprises are shut for another week, Shanghai, 24 million people, Hangzhou is another 11 million people,” Perret-Green said.
“A huge tranche of the urban population is shut down, a huge tranche of business, so a lot of Chinese companies are just going to have to declare force majeure and shut down orders.”
In a statement issued Monday, Perret-Green said the coronavirus outbreak represented a “Lehman-type moment tipping point” which could “tip the global economy into effective recession.”
A new economic picture
A key difference between 2003 and now is the size and significance of the Chinese economy within the global picture.
Perret-Green highlighted that at the end of 2002, Chinese GDP (gross domestic product) was estimated at around $1.5 trillion, 4% of global GDP. By the end of 2019, this was $14.3 trillion and over 16% of global GDP. In the aftermath of the SARS outbreak, China was still experiencing rapid growth having just joined the World Trade Organization (WTO).
“If the WHO (World Health Organization) is correct and the virus impacts for months, it doesn’t seem unreasonable that it could knock at least 1% off China’s growth and 0.5% off global growth,” Perret-Green said in a note published Friday.
“Indeed, we believe that it could be much greater than that. Such is China’s interconnectivity with the global economy. With global growth set to remain weak — the World Bank is forecasting only 2.5% this year — it’s not inconceivable that China could tip the global economy into an effective recession.”
Developing Asia recovered at an 11% GDP growth pace after the summer of 2003, indicating that the negative effects were somewhat short-lived.
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