SARS can’t be a model for Covid-19
China composed only 5% of the world economy in 2003 and was just in the process of becoming central to global supply chains
COMMENTATORS seeking to understand the long-term implications of the coronavirus (Covid-19) are frequently comparing it with the 2002–2003 severe acute respiratory syndrome (SARS) outbreak, which had a severe impact on both the Chinese and the global economies. But is SARS really a good case study for understanding the likely economic effects of Covid-19?
In April 2003, the World Health Organization issued a global health alert and China announced the closure of schools, public venues and the first quarantine measures. This coincided with a significant reduction in Chinese gross domestic product (GDP) growth, which fell in Q2 2003 by 2.1%.
Driven by a reduction in services and manufacturing growth, observers argue that SARS is a good case study because this was at least partly caused by the Chinese government’s containment measures. However, there are significant differences between the situation today and that of China in 2003.
Then, China composed only 5% of the world economy and was just in the process of becoming central to global supply chains on the back of its World Trade Organization accession in 2001. Rather than being a driver of the world economy, China was more a recipient of fluctuations and shocks from elsewhere.
Moreover, there were two important global economic developments occurring at the same time which could have played a role in this reduction: First, in early 2003, growth in G7 economies – 75% of global GDP at the time – was slowing; and second, was the anticipated US invasion of Iraq, which reduced global oil production by around 2%.
A simple linear regression analysis illustrating the extent to which industrialized country growth and real oil price growth rates impacted Chinese GDP growth from Q1 2001 to Q4 2007 shows that these global factors would have led to a moderation of growth in China even without the SARS outbreak.
The residual weakness in growth, which can be attributed to China-specific factors in that quarter, is 1% – much lower than the 2.1% effect that can be calculated by looking at quarterly growth rates alone.
This suggests the effect of SARS was likely greatly exaggerated in Chinese GDP data, meaning it may not be a good case study for understanding the potential economic consequences of Covid-19 on Chinese real GDP growth. But what should we look at instead?
The most useful approach is to quantify the effect of lost working days on overall production. The current measures imposed by the Chinese government through early February are estimated to have led to eight lost working days for the country as whole. A reduction in one working day in Q1 leads to roughly a 0.4% loss in output, meaning that the eight lost working days so far translate into a quarterly growth reduction of 3.2%.
This number is 50% larger than 2.1% growth impact measured during the SARS outbreak, and three times as large as the estimated 1% impact adjusted for external factors.
Although this number could rise further, it is significantly smaller than extrapolating the economic impact based on virus cases in China, which, with over 80,000 cases to date, is 15 times larger than the 5,237 cases that China experienced during SARS.
Thus, by looking at the sensitivity of growth to each working day lost (0.4% of GDP), we can get a much better sense of the economic impact of Covid-19 than can be obtained from arbitrarily scaling up the consequences of SARS. The same method can be applied to the impact of Covid-19 on growth in other countries that have been badly hit by the virus, including Italy.
While investors globally are monitoring developments in Covid-19, T. Rowe Price believe a particular important indicator to watch is working days lost, which could help us gain a better understanding of the potential effect the virus may have on Chinese GDP.
Tomasz Wieladek is an international economist at T. Rowe Price
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