What the coronavirus means for the economy

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The spread of the coronavirus — which has claimed dozens of lives and sickened hundreds of others — is reverberating across the global economy, and injecting more uncertainty into markets that already have more than they need.

In Asia, the epidemic has upended the Lunar New Year, as Beijing and global health officials move to contain its spread by imposing quarantines and cancelling flights, affecting 35 million people. In the U.S., the Center for Disease Control has identified at least 2 domestic cases, and are monitoring 63 other possible infections, the agency said on Friday.

Investors have reacted by selling off assets in Asia, in part linked to positioning ahead of a long Lunar holiday weekend. Markets in mainland China were closed on Friday, and will reopen next week. Trading in Hong Kong will shut down on Monday and Tuesday.

“I think investors in Asia have been selling stocks to not get stuck if this gets out of control over that time, but I do expect a relief rally on the other side when this hopefully will have proven to be not as bad as feared,” Brad Loncar, a biotech investor, told Yahoo Finance.

‘Rather limited’ impact

However, analysts anticipate the most immediate effect will be felt in the leisure sector, as flights are cancelled and travel plans get postponed.

On Friday, McDonald’s (MCD) announced it would suspend business in Wuhan and its surrounding cities; meanwhile, some health care stocks have already seen a fleeting boost as the crisis reared its head.

At least for now, economy watchers expect China — the virus’ epicenter — and its regional partners to bear the brunt of the disease’s spread. Reaction has been relatively muted in U.S. stock markets after the first U.S. case was reported this week.

The Center for Disease Control has said the risk to U.S. residents is low, and the patient from the first confirmed U.S. case in Seattle is recovering. Meanwhile, pharmaceutical companies are racing to develop a vaccine or treatment for the virus, though it is likely nothing will be ready before the outbreak ceases.

Elevated perspective on a busy city street
Elevated perspective on a busy city street

The mysterious illness has drawn parallels to the severe acute respiratory syndrome (SARS) epidemic of 2002-2003, which triggered a brief investor panic as China struggled to get ahead of its spread.

“The number of people infected by recent viral outbreaks...is often rather limited relative to major pandemics of the past or even common illnesses,” wrote Jay Bryson, Wells Fargo’s chief economist, in a research note on the topic this week.

He cited the U.S. flu season, which claimed at least 6,600 lives — a far greater number than the estimated 26 who have died from the coronavirus in China.

“The cost of these outbreaks may appear small in terms of medical expenditures and lost wages, but the rapid manner in which they spread can create an outsized economic impact,” Bryson added. Yet he noted that the SARS epidemic was “relatively short-lived [but] the outbreak resulted in hundreds of deaths and a loss of at least $40 billion for the global economy.”

With flight cancellations and quarantines, attention largely shifted to how the outbreak would affect Asia, with economists expecting the impact to be contained to the first quarter of 2020.

The virus continues to spread in China, with more than 26 deaths and more than 830 infections confirmed by Chinese health officials Friday. Meanwhile, cases have also been confirmed in Hong Kong, Macau, Thailand, Korea, Japan and Singapore.

Shopping and restaurants could be hit by reduced activity in the region as Chinese health officials warn against spending time in public spaces, and a few early estimates suggest it could shave as much as a full point from China’s gross domestic product.

The largest impact is likely to be felt from the travel restrictions in and around Wuhan, which is a major thoroughfare in China. With the reduced travel in and around the world’s second-largest economy, analysts say oil prices could drop, especially for jet fuel.

Yet Goldman Sachs noted this week that historically, the negative impact on growth from disease outbreaks typically reverses within a few months.

And Jeffries analysts noted Friday that despite the “softening stock” in China and Hong Kong leading up to the Lunar New Year holiday, both markets saw noticeable gains in mutual and exchange-traded funds (ETFs).

Anjalee Khemlani is a reporter at Yahoo Finance. Follow her on Twitter: @AnjKhem

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