Observations on the

potential economic
impact of nCoV
February 6, 2020

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Key messages

China is in a different position today compared with SARS in 2003, creating a larger ripple effect throughout the global economy; larger scale (13x larger
GDP), stronger connectivity in domestic (4x more) and global (2.5x more) people flows, and heavier involvement in global value chains (2x higher global export
share).

Sectoral exposure: Consumption and service related sectors (e.g., travel and logistics, hospitality, retail) are likely to be hit harder due to declining demand.
Industrial sectors, where Hubei plays an important role (e.g., automotive), are likely to experience supply chain disruptions on a global scale.

Geographic exposure: Countries with heavy exposure to Chinese supply, demand and people flows (e.g., Korea, Malaysia, Singapore, Vietnam, Thailand, etc.) will
be hit harder due to disruptions in regional supply chains, declining exports to China and falling numbers of Chinese tourists.

Consensus views from various institutions suggest that the outbreak may reduce 2020 annual GDP growth by 0.2~0.8 percentage point under baseline scenario
(e.g., outbreak controlled in Q1). In a pessimistic scenario (e.g., continued spread in Q2), the negative impact on growth could surpass 1 percentage point. However,
the long-term economic growth trajectory appears to remain solid.

Chinese policy makers are responding by introducing monetary easing (e.g., RMB1.2 trillion liquidity injection) and potential fiscal support (e.g., tax cuts for
affected sectors, increasing fixed asset investment). Companies have been taking actions by temporarily closing China operations (e.g., Apple, Starbucks),
relocating workforce (e.g., pharma/tech companies), and reducing demand (e.g., cutting oil imports).

Historical case studies suggest that pandemic diseases not only create economic losses (e.g., 1~5% GDP impact) but also substantially contribute to stress in
society (e.g., disruptions in education/healthcare leading to loss of human capital).

In the mid to long term, it is important to develop effective systems to deal with emergencies and crises including health emergencies. Policy makers can secure
commitment both at national and local levels, strengthen early warning systems and establish mechanisms to engage multiple stakeholders including local and
international communities and private sector. Businesses need to develop contingency planning capabilities, diversify supply chain risks, and build goodwill to
support social agenda.
McKinsey & Company 2
China is in a different position today compared with SARS in 2003,
creating a ripple effect throughout the global economy
Implications for 2019-nCoV
2003 Today
spread and impact
Larger scale
GDP $1.7 trillion $13 trillion
Pace of 2019-nCoV spread is faster than
Share of global GDP 4.4% 17%
that of SARS in 2003 partially due to high
connectivity within China and with the
More urban world, high concentration of population
Urban population 512 million 824 million
Urbanization rate 49% 60%
2019-nCoV likely to create larger global
More integrated in impact given China’s large scale and
deeper involvement in global value chains
global value chains
Share of global exports ~5% ~11%
Higher share of service sectors can
More service oriented potentially create more vulnerability to
declining demand especially in tourism,
Service sector share of GDP ~42% ~54%
hospitality, retail, and transportation
sectors
More connected
Connectivity within China ~1 billion ~4 billion
(passenger flows)
Connectivity with world ~111 million ~281 million
(in/outbound trips)

Sources: World Bank; China National Statistics Bureau; McKinsey Global Institute analysis McKinsey & Company 3
2019-nCoV is spreading faster and to more countries than SARS
Last updated: February 4, 2020
2019-nCoV has spread across 24 countries, ~80% of which
Cumulative number of confirmed cases globally1 were affected in just the past week

22,000
20,630
20,000 (as of Feb 4 2020)
Finland

18,000 2019-nCoV Canada

Germany

16,000 France
Japan USA
Nepal China
India Republic of Korea
14,000 Thailand
UAE Cambodia
Vietnam
Sri Lanka Philippine
12,000 Singapore
Malaysia
s

10,000
Australia

8,000

6,000 SARS
Number of
4,000 confirmed cases
1-2
2,000 3 - 10
11 - 100 ​China

0 101 - 500
Dec Jan Feb Mar Apr May June > 500
Hubei province
2002-03 (SARS)
Country, area or territory with cases
2019-20 (2019-nCoV)
1. Includes 20471 cases in China, and 159 cases outside China; Latest numbers are available from a number of sources, including daily situation reports from the World Health Organization available here
Source: WHO, China National Health Commission, US CDC, NPR, team analysis McKinsey & Company 4
 Sectoral exposure (1/2): Consumption and service related sectors
are likely to be hit harder due to declining demand
Tertiary sector, especially transport and logistics, hospitality and The economic impact from 2019-nCoV in exposed sectors is mixed due
catering, and financial services, suffered the most from SARS to structural changes
Impact on China GDP during SARS (2003 Q2)1 GDP contribution2 Observations on potential impact

Tertiary Transport 2003 2019

-5.0%
sector and logistics Freeze/suspend flights to China (e.g.,
Transport, Storage and
Hospitality ~6% ~4% Cathay Pacific reducing by 50% )
-3.2% Post
and catering Declining customer traffic (e.g., one
Hospitality and
~2% ~2% restaurant chain’s revenue down by
Financial services -3.2% catering
90%)

~4% Shanghai exchange down by 8% on

Other services -2.0% Financial services ~8%
Feb 4
Secondary Industry -1.8% “Coronavirus could be ‘death blow’
Manufacturing ~32% ~27%
sector for many of China’s small
manufacturers if not under control by
Construction -1.5% Construction ~5% ~7%
April” - SCMP
Primary Disruption in supply (e.g., feedstock)
Primary sector -1.1% Primary sector ~12% ~7% and demand (e.g., restaurant)
sector
Real estate 1.4% Slowdown in building/selling
Tertiary
Real estate ~4% ~7% properties likely to disrupt
sector developers’ cashflows
Retail sales 1.8%
ING estimates retail YoY growth drop
Retail sales ~8% ~10%
from 8% in Dec. 2019 to 3-4% in
2020 Q1
1. Defined as [(Q2 2003 YoY ratio - Q1 2003 YoY ratio) / (Q1 2003 YoY ratio]; the economic impact of SARS in China mostly occurred in Q2 2003
2. Data source: National Bureau of Statistics of China
Source: National Bureau of Statistics of China, team analysis McKinsey & Company 5
Sectoral exposure (2/2): Industrial sectors where China plays an
important role in global value chain may experience bigger disruption
China’s share of trade by sector
China’s share of global exports (Top 5)
Textiles, apparel, and leather
Computers, electronics, optical products 28%
Bangladesh’s apparel industry, the $34 billion industry and the lifeline
of the economy may suffer badly due to the outbreak of ongoing
Coronavirus as the supply chain of raw materials for the sector might
40%
be disrupted if it prolongs and spreads further.
The Textile Today Analysis

Electrical equipment 27%

The epicenter of the outbreak is Wuhan, one of China’s largest
Furniture, safety, fire, other 26% manufacturing centers. Foxconn and Pegatron have operations there,
as do memory manufacturers…
Fabricated metal products 23%
EETimes
China’s share of global imports (Top 5)

Mining and quarrying 21%

The coronavirus could create supply-chain problems for Apple and
Agriculture, forestry, and fishing 19% other smartphone makers that could disrupt overall shipments.
Analysts at IHS Markit technology research
Computers, electronics, optical products 16%

Chemicals 12%
Restricted labor movement triggered by the coronavirus has stark
Paper and paper products 12% implications for China’s steel and raw material demand.
Wood Mackenzie
Source: IHS Markit; McKinsey Global Institute analysis McKinsey & Company 6
 Geographic exposure (China): Hubei accounts for 69% of total
cases and 5% of China’s GDP; nCoV is spreading nationally
2019-nCoV confirmed cases by province, and GDP by province, and share in Passenger traffic by province
share in Mainland China Mainland China
Feb. 5, 2020 % 2019, trillion RMB % 2018, billion people
1. Hubei 16,678 69 7. Hubei 5 5 7. Hubei 1.0
2. Zhejiang 895 4 4. Zhejiang 6 6 6. Zhejiang 1.0
3. Guangdong 870 4 1. Guangdong 11 11 1. Guangdong 1.4
4. Henan 764 3 5. Henan 5 5 3. Henan 1.1
5. Hunan 661 3 9. Hunan 4 4 4. Hunan 1.1
6. Jiangxi 548 2 16. Jiangxi 2 3 13. Jiangxi 0.6
7. Anhui 530 2 11. Anhui 4 4 12. Anhui 0.6
8. Chongqing 366 2 17. Chongqing 2 2 14. Chongqing 0.6
9. Jiangsu 341 1 2. Jiangsu 10 10 2. Jiangsu 1.2
10. Sichuan 301 1 6. Sichuan 5 5 5. Sichuan 1.0
11. Shandong 298 1 3. Shandong 7 7 11. Shandong 0.7
12. Shanghai 233 1 10. Shanghai 4 4 26. Shanghai 0.2
13. Beijing 228 1 12. Beijing 4 4 15. Beijing 0.6
14. Fujian 194 1 8. Fujian 4 4 16. Fujian 0.5
15. Heilongjiang 190 1 21. Heilongjiang 2 2 22. Heilongjiang 0.3
The rest 1,195 5 The rest 24 25 The rest 5.5
McKinsey & Company 7
Source: China CDC; National Health Commission of China; DingXiangYuan; National Bureau of Statistics; McKinsey Global Institute analysis
 Geographic exposure: Asian countries are the most exposed, as they
are tightly integrated with China
Exposure to Chinese demand Exposure to Chinese supply Exposure to people flows
Exports to China as % of GDP, 2018 Imports from China as % of GDP, 2018 Number of trips1, Million, 2018 The biggest knock-on effects
would be felt by Hong Kong,
Singapore 14 Vietnam 47 Thailand 11 followed by South Korea and
South Korea 10 Singapore 21 Japan 11 Japan.
Malaysia 10 Malaysia 18 South Korea 8
Thailand’s GDP would fall
Chile 8 Philippines 14 Vietnam 8
by more than 1%.
Australia 6 Thailand 11 United States 5
Thailand 6 Netherlands 10 Singapore 4
Switzerland 4 South Korea 10 Malaysia 4 Japanese growth could be
Brazil 3 Indonesia 5 Russia 3 cut by 0.2%.
Russia 3 Australia 4 France 3
Japan 3 Japan 4 Indonesia 2
Vietnam’s GDP growth target of
Germany 3 India 4 Germany 2
6.6-6.8% YoY in the first quarter
Philippines 3 Russian 3 Philippines 2 is very challenging, and real
Indonesia 3 United States 3 Australia 2 growth can only be around 6-
6.5%.
India 1 United Kingdom 2 Canada 1
United States 1 Germany 2 United Arab Emirates 1

1. Number of trips include both inbound (destination as China) and outbound (origin as China) trips McKinsey & Company 8
Source: Euromonitor, UN Comtrade, MGI Analysis
Consensus views suggest that the outbreak may reduce 2020
annual GDP growth by 0.2~0.8 percentage point
Estimated
impact to 2020
GDP growth

China 0.2% 0.3% 0.3%1 0.5% 0.5-1.5% 0.6% - >1% 0.8%

Global 0.1% 0.1-0.3% 0.2% 0.3%

for US and euro excluding
areas China

“In a containment scenario, with a severe but short- “Long-term growth trajectory “In the most likely scenario for the
lived impact, the virus could deliver a severe blow to and structural change will spread of the virus, the disruption
growth in the first quarter, followed by a recovery and unlikely be altered.” caused by the coronavirus will cut ...
stabilization in the second half. That trajectory would 0.8 percentage points from growth
put full-year growth at 5.7%, which is 0.2 for all of 2020…We estimate the cost
percentage point below Bloomberg Economics’s to the Chinese economy will be
forecast prior to the outbreak” about the same [as SARS].

1. In a forecast dated Dec. 23 2019, Goldman Sachs Research expects China’s GDP growth will be 5.8% in 2020; On Feb. 4 2020, Goldman estimates China’s growth will slow to 5.5 per cent this year.

Source: Bloomberg Economics, The Economist, Moody’s, Reuters, New York Times, Financial Times, analyst reports McKinsey & Company 9
Back-up: Potential magnitude of economic impact (1/4)
Est. impact to GDP growth
China Global Description

0.3%1 0.1-0.3% China “Goldman estimates China’s[sic] growth will slow to 5.5 per cent this year”

Annual Annual Global “The US bank [Goldman] estimates a hit of 0.1 to 0.2 percentage points to growth of
global gross domestic product in 2020 under its baseline scenario, which assumes the rate of
infections slows significantly in February and March thanks to an aggressive response from
Feb. 4 Chinese authorities.
Quotes from Financial Times
[…] In a more severe scenario, in which the rate of infections does not peak until into the
second quarter, Goldman thinks the hit would rise to 0.3 percentage points of GDP.”

China “Assuming that the outbreak will be controlled in Q1 with few new cases thereafter, [..] we
0.6% - downgrade China's 2020 GDP growth forecast to 5.4% [from 6.0%] … In the case the
Feb. 3
>1% outbreak lasts well into Q2, GDP growth will likely fall <5% in 2020.”

Annual “Long-term growth trajectory and structural change will unlikely be altered. […] GDP
growth in 2021 will likely rebound close to 6% in our base case, and more in the worse case
scenario.

Sector “We expect consumption to be hit significantly, especially in travel and tourism, hotel
and catering, and transport. We think overall retail sales growth could weaken by at least 5ppts
in Q1. FAI and property construction should be hit by less but likely more than during the
SARS period.”
1. In a forecast dated 23 December 2019, Goldman Sachs Research expects China’s GDP growth will be 5.8% in 2020

Source: The Economist, Moody’s, analyst reports, press search McKinsey & Company 10
Back-up: Potential magnitude of economic impact (2/4)
Est. impact to GDP growth
China Global Description

0.8% 0.3% China “In the most likely scenario for the spread of the virus, the disruption caused by the
excl. China coronavirus will cut more than 2 percent points from Chinese real GDP growth at an annualized
Annual Annual rate in the first quarter of this year and 0.8 percentage point from growth for all of 2020
Feb. 3 …we estimate the cost to the Chinese economy will be about the same [as SARS].

Sector “…primarily hurt China’s economy by lowering discretionary consumer spending on

transportation, retail, tourism and entertainment. It could also disrupt domestic supply
chains if the outbreak persists, resulting in a broader hit to the economy.

Global “…expected to reduce global real GDP, excluding China, by 0.8 percentage point in the
first quarter of this year and 0.3 percentage point for all of 2020.”

0.5-1.5% China “The spread of a novel coronavirus from Wuhan risks taking 0.5-1.5 percentage points
off our real GDP forecast of 5.9% growth in 2020, given the disruption to production, travel
Feb. 3 Annual
and consumption.”

0.5% 0.2% China “China’s economic growth is expected to slip this year to 5.6 percent, down from 6.1
percent last year, according to a conservative forecast from Oxford Economics that is based on
Annual Annual
Feb. 3 the impact of the virus so far.

Quotes from New York Times Global That would, in turn, reduce global economic growth for the year by 0.2 percent, to an
annual rate of 2.3 percent — the slowest pace since the global financial crisis a decade ago.”
Source: The Economist, Moody’s, analyst reports, press search McKinsey & Company 11
Back-up: Potential magnitude of economic impact (3/4)
Est. impact to GDP growth
China Global Description

Sector “We estimate the outbreak will likely lead to 20-30 percentage points drop in profitability
of non-finance industries in Q1, but overall impact on profits in 2020 will likely be limited to
around 5 percentage points. […] Taking the SARS outbreak as reference, service and
Feb. 2 consumption industries will be hit significantly, while manufacturing industries will be
impacted less. We foresee there is potential positive impact on industries such as online
education, video, gaming and etc. ”

China “Experts have been exploring the 2003 SARS outbreak to get a sense of the potential
economic impact of the coronavirus. A 2004 study from The Brookings Institution, Korea
Feb. 1 University and the Australian National University estimated that the [SARS] outbreak
delivered a $40 billion hit to the global economy; that would amount to about $56 billion
today, adjusting for inflation.”

China “Citigroup revised its full-year forecast for China’s GDP growth to 5.5% in 2020 from
0.3% 5.8%. The bank also cut first-quarter growth expectations to 4.8% from 6% in the fourth quarter
Annual
Feb. 1 of 2019.”

>2% China “Real GDP growth in [first quarter] 2020 could materially drop from the 6.0% pace
achieved in [the Q4 of] 2019, on a scale perhaps bigger than 2pp registered during the SARS
Jan. 30 Quarter
outbreak in 2003
1. In a forecast prior to the virus outbreak, Nomura expected China’s GDP growth will be 5.7% in 2020

Source: The Economist, Moody’s, analyst reports, press search McKinsey & Company 12
Back-up: Potential magnitude of economic impact (4/4)
Est. impact to GDP growth
China Global Description

0.2% 0.1% Overall “In a containment scenario, with a severe but short-lived impact, the virus could deliver a
for US and severe blow to growth in the first quarter, followed by a recovery and stabilization in the second
Jan. 29 euro areas half. That trajectory would put full-year growth at 5.7%, which is 0.2 percentage point below
Bloomberg Economics’s forecast prior to the outbreak and down from 6.1%”
Annual Annual
Sector “The consumption related industries will be hit most significantly. We estimate the growth
of consumption will drop by 2.8 percentage points from the forecast prior to the outbreak
and more than half of the growth (5.5%) in Q4 2019.

Global “Virus fallout could knock [sic] 0.1 point from U.S. and euro area.”

~1.0% China “GDP growth in the first quarter of 2020 could be about 5.0%, and we cannot rule out the
Quarter possibility of falling below 5.0%.” - Zhang, an economist at the Chinese Academy of Social
Jan. 29 Sciences”

China “The coronavirus outbreak in China was likely to hurt global growth in the near-term and
1.0% 0.15- could shave up to 1 percentage point off Chinese growth in the first quarter
Jan. 29
0.3%
Global “Assuming the coronavirus peaks in February or March, global economic growth could be
Quarter Quarter
reduced by 0.15 to 0.3 percentage point during the first quarter”

Source: The Economist, Moody’s, analyst reports, press search McKinsey & Company 13
Companies’ and government’s response to the virus outbreak
Companies
Factory closures: Extended shutdown of Chinese factories
disrupts supply of Chinese-made parts and hits worldwide
manufacturers such as Apple and Tesla
Store shutdowns: International brands, such as Starbucks,
McDonald’s, have shut down thousand of outlets
Oil import reduction: China National Chemical and Hengli
Petrochemical have reduced oil purchases in response to the
Wuhan city lockdown and pushed OPEC to react to falling demand
Workforce relocation: Multinational players in pharmaceutical,
financial and technology sectors are evacuating expats, while
others are relocating staffers from China for 3~6 months
Flight cancellations: Major airlines are suspending flights to China;
nearly 10,000 flights were canceled as of Feb 3rd
Source: press research, analyst reports, team analysis
Chinese government
Quarantine: China cordoned off cities in Hubei, cutting off transport
links to ~40mn people, aiming to stop the spread of the virus
Holiday extension: China market remained shut from CNY for 3
additional days until Feb 3rd, and more than 20 provinces
/municipalities announced a further holiday extension until Feb 10th
Monetary easing:
PBC announced it would provide RMB1.2tn in reverse repo to inject
liquidity on Feb 3rd
China’s major banks will lower lending rates for affected companies
Fiscal easing:
Tax cuts expected for affected sectors (e.g., travel, transportation,
logistics, tourism, hotel, retail) and SMEs
Targeted support, including spending expansion on healthcare
subsidies and employment support, is expected to grow
Infrastructure investment is expected to rise to offset weaker
consumption
McKinsey & Company 14
Case studies (1/2): Impact of notable epidemics since 1900

Economic impact Social impact

 GDP loss of >10% in major economies such  Long-term impacts on productivity, e.g., through
Spanish flu
as the United Kingdom, Canada and the average reduction of 0.3-0.4 years of
1918 20~100 mn deaths United States schooling for the cohort born in 1918-1920 in
Global  Nearly 5% drop in global economic activity, Italy
costing the world about $3.1 trillion

 SARS reduced China GDP growth about 1%  Recovered SARS patients and their families
in 2003; GDP loss of US$4 billion in Hong experienced discrimination in the workplace
SARS Kong; US$3-6 billion in Canada; and US$5 and in their communities
2003 billion in Singapore
4 continents, 37  Asia-Pacific and North American airlines had
744 deaths revenue loss of $6 billion and $1 billion
countries

 Economic losses ranged from 0.5% to 1.5%  Influenza A (H1N1) was described as: "a
of GDP in affected countries stigmatizing agent", because of the way many
Swine flu/H1N1  Tightened consumer spending negatively rejected or even discriminated against the inhabitants
0.15-
2009 impacted tourism, travel, hotels and other of Mexico City as a result of the outbreak in the city
0.6 mn
Global service industries. Canceled events, closed  Different political parties in Mexico positioned the
deaths movie theaters, and other establishments cost outbreak as “a punishment” because of
$57 million a day and 36% drop of revenue in legalization of abortion
Mexico

Source: National center for Biotechnology information (Pandemics: Risks, Impacts, and Mitigation); The Economist; Mexican Chamber of Trade, Services and Tourism; World Bank; Literature search McKinsey & Company 15
.
Case studies (2/2): Impact of notable epidemics since 1900

Economic impact Social impact

 An estimated US$2.6 billion in lost  The MERS epidemic had a negative effect on the
MERS revenue for tourism and tourism-related labor market due to the fear of contagion
2012 service sectors, which was equivalent to
22 countries 659 deaths 0.2% of Korea GDP in 2015, triggering
US$14 billion in government stimulus
spending

 US$716 million GDP loss in Guinea,  Those affected by Ebola or working to combat it
Liberia, and Sierra Leone (such as healthcare workers and burial teams)
Ebola  Ebola slowed GDP growth by 2-5% for the faced stigmatization. Social cohesion was
11,300 three countries in 2014 weakened by ‘do not touch’ policies. Women and
2013 children were particularly affected by the crisis
deaths  The fiscal deficit in Liberia and Sierra
10 countries Leone widened by 4.7% & 1.7%,
respectively

 US$7–18 billion loss in Latin America and  Children with microcephaly didn’t have the ability to
the Caribbean achieve their full cognitive potential because of
Zika 2,656 reported cases
 Loss in tourism revenue in Malaysia, inborn impaired cognitive and physical development,
2015 of microcephaly or leading to the eventual loss of productivity
Thailand, etc.
central nervous  The governments in Brazil and other countries in
76 countries system malformation the region advised women of reproductive age to
postpone pregnancies, which resulted in a
slowdown in population growth

Source: National center for Biotechnology information (Pandemics: Risks, Impacts, and Mitigation); The Economist; Johns Hopkins University; Literature search McKinsey & Company 16
Potential implications for companies and policymakers
Companies
Global supply chains:
 Contingency/Scenario planning: If virus growth is sustained for prolonged
period of time, even companies with little/no production in China will be
impacted due to China's central role in global supply chains
 Diversification: Seek options to diversify production and supply chain risks
China strategy:
 Long-term view: While short-term disruption is inevitable, long-term growth
trends may remain solid. Consider ways to build goodwill (e.g., helping
response effort, protect employees/communities, etc.)
 Digital opportunities: There are indications that the 2019-nCoV is
accelerating China's shift to e-Commerce spending. This shopping behavior
could be sustained even beyond the virus outbreak
Policy makers
Build effective emergency/crisis response system
• Commitment: Endorsement by national/local
leadership to dedicate substantial resource and
capacity to strengthen institutional capabilities
• Prevention: Early detection and containment of
potential virus outbreaks is critical in ensuring an
effective response. Policy makers can invest in early
warning systems leveraging public and private data
sources to detect future virus outbreaks early
• Multilateral engagement with various
stakeholders: Effective virus outbreak response
requires multilateral action across public and private
sectors and across countries. Scientific breakthroughs
in 2019-nCoV research have come from private
enterprises and public universities from China and
abroad
McKinsey & Company 17