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Rough economic seas ahead as Wuhan virus spreads

Source: Middle East Insurance Review | Feb 2020

Experts fear the Wuhan coronavirus outbreak in China will have a major impact on economic growth in China, and that of the wider global economy.
 
S&P Global Ratings’ Asia-Pacific chief economist Shaun Roache said in a recent note that household spending in China would definitely take a hit. Domestic consumption has become an increasingly important driver of the Chinese economy – contributing approximately 3.5% to the overall GDP growth rate of 6.1% in 2019.
 
Recent events draw obvious parallels to the SARS virus outbreak of 2003, which took the lives of nearly 800 people worldwide. About 90% of fatalities back then were in China and Hong Kong.
 
“China’s GDP contracted by an estimated 1% in 2003 because of the SARS outbreak. SARS also was a coronavirus and the outbreak coincided with the Chinese New Year,” said Mr Roache, pointing out the similarities.
 
At the time of writing, China has diagnosed more cases of the Wuhan virus (7,700) than it did of SARS (5,327). Although it appears to spread faster, the fatality rate of the Wuhan virus (2%) is much lower than SARS (9.6%).
 
Economic hub
While the SARS virus was more deadly, economists point out that the economic effects of the Wuhan virus would trump that of the SARS era considering that Wuhan – the epicentre of the virus – is one of China’s major industrial cities. The fact that the entire city has been shut down will have major economic repercussions.
 
In an effort to curb the spread of the virus, the Chinese government extended the traditionally week-long Chinese New Year holidays by a further three days to 2 February. Some local governments, such as in Shanghai, went a step further and ordered its businesses to remain shut until much later.
 
The standstill of many of the country’s manufacturing hubs is likely to have a disruptive effect on the global economy which relies on China as a cog in global supply chains. Having been the primary engine of global economic growth in the last decade or so, China’s importance to global economic growth is undoubtedly more significant than it was during the 2003 SARS scare.
 
“The outbreak will potentially have a disruptive effect on global supply chains. Global companies operating in the affected area may face output losses as a result of the evacuation of workers,” said a Moody’s report.
 
Moody’s went on to say, “Companies operating outside China that have a strong dependence on the upstream output produced from the affected area will also be under pressure because of possible supply-chain disruptions resulting from temporary production delays.”
 
Tourism to suffer
Aside from supply chain disruptions, Asian countries that rely on China as their main source of tourist arrivals are left reeling after China imposed travel bans on outward group tours in order to curb the spread of the virus.
 
“The fear of contagion could dampen consumer demand and affect tourism, travel, trade and services in Hong Kong, Macao, Thailand, Japan, Vietnam and Singapore, which have been the top destinations of Chinese tourists in recent years,” said Moody’s.
 
Stocks take a hit
Stock markets from Asia, to Europe, and the US saw huge dips as investors diverted their money to traditional safe havens like the dollar and gold. Stocks in Japan and Europe fell more than 2%, while the S&P 500 was down 1.6%.
 
Insurers’ exposure to pandemic risks contained
From an insurance perspective, most of the business interruption clauses in standard property policies are only triggered as a result of physical damage. While parametric insurance solutions for pandemics and epidemics exist, they tend to not be as widely bought by companies.
 
“Property & casualty insurers may suffer some losses due to business interruption, event cancellations and travel related covers, but these losses will be manageable for them,” said AM Best.
 
The rating agency added that in terms of mortality exposure, the life and health sector is expected to be able to bear the cost as most life and health companies have already addressed pandemic risks by conducting stress tests for various modelled assumptions. M 
 
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