‘Lehman-type’ moment? Analysts warn that markets are too complacent over coronavirus risks

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 pp 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 from 80 million to 660 million, he suggested that the cost of shutting down huge cities had not been properly priced in.

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 billion, 4% of global GDP. By the end of 2019, this was $14.3 trln. 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).