Tips & Opinions

Coronavirus
Covid-19

It would be a mistake for anyone to pretend that he or she can forecast the direction of the Covid-19 virus.  Some media reports speak about prospects as though the world should anticipate something akin to the Black Death that devastated Europe in the Middle Ages.  Parts of the public seem to have bought into this story or something like it, for in some places necessities are flying off store shelves faster than they can be restocked.  If this sort of story telling contains more hyperbole than probability, it would also be the height of complacency to insist that today’s events will go the way of pandemics from earlier in this century.  The SARS disease of 2002-04, the killer influenza that swept the world in 2009, and the MERS affliction of 2012 all ran their courses quickly, allowing markets and economies to rebound in a matter of weeks, months at most.

Matters remain fluid, as people say when they have little definite to say.  Still, a dispassionate look at all the possibilities for the future would point to the start of some sort of recovery for most of the world’s economies and markets by the second half of the year. China’s prospects, however, look more problematic.

For the current quarter, Covid-19 has already done considerable economic damage.  China’s economy likely is already in recession, whatever Beijing’s ever-optimistic official figures show after the fact.  Data is far from complete, but what is available indicates that auto sales have fallen 8 percent, while mobile phone sales have fallen 7 percent.  The February report by China’s manufacturing-purchasing managers showed more than a 20 percent drop from 51.1 in January to 40.3. (A figure of 50 demarcates between growth and decline.)

That harm has spread quickly to the rest of the world, actually faster than the virus itself has spread.  Exports to China have suffered, putting burdens on producers throughout the world. Economies from Asia to Europe to North America have lost billions from the sudden and complete halt of what not too long ago was a flood of moneyed Chinese tourists.  Production shutdowns in China have also interrupted the flow of materials and parts to producers around the world, slowing and in some cases shuttering their facilities. The Group of 20 (G-20) trading nations estimates that the disease has already cost the world economy $1 trillion in production.  It would not be a surprise to see slower growing economies – notably Japan and several in Europe – join China in a quarter or more of real economic decline.

Bad as this looks, it does not necessarily confirm the popular disaster scenario.  Current setbacks could reverse quickly. The disaster scenario so popular with certain media outlets and elements of the public is of course possible.  Anything is possible. But for those who feel the temptation to panic in this way, it might help to keep two facts in mind. First, the Black Death occurred 700 years ago, and nothing like it has reappeared in the intervening period.  Second, even the great influenza pandemic of 1919, though it killed more in a year than died in four years of war between 1914-18, only briefly delayed the huge economic and societal recover of the 1920s.

Instead of disaster, the world’s economic and financial future in this matter would seem to turn on two alternative models of what might happen. Most inviting of the two is the pattern followed by the SARS pandemic and others from earlier in this century.  All the pandemics quickly offered reason for people to dispense with their darkest concern, leaving room for most economies to move toward quick recoveries. In the present case, such an outcome would suggest a mixed picture in the spring quarter and the building of economic momentum during the second half of the year.  No doubt the Federal Reserve’s (Fed’s) recent interest rate cuts would accelerate the pattern. Though in this case, the rate cuts would hardly be necessary, the Fed surely could not count on expectations of such a rerun of the past and had to act as though things would take longer to improve.

Alternatively, if the disease becomes more stubborn than these predecessors, the general economic and societal responses might resemble those surrounding the AIDS pandemic that began late in the last century.  When people first became aware of this affliction in the 1980s, markets panicked and evidence of considerable economic dislocation emerged. Unlike SARS and other pandemics, this disease did not dissipate. It never caused the widespread death and economic harm that people feared at the beginning, but it has remained and become a part of life since, like cancer or heart disease.

Were the Covid-19 virus to follow this pattern, people would miss outright relief but would likely temper their fears nonetheless, allowing pre-existing economic and social arrangements to reassert themselves gradually.  As happened with AIDS, economies and markets would in time return to the underlying growth paths that predate the disease — some strong, some weak – but it would take longer than the kind of rebound associated with SARS and the other pandemics already mentioned.  Using this history as a guide, the catch up would probably reach completion some time in 2021. The Fed’s recent rate cuts might accelerate this process, and so in retrospect seem well timed. 

If the world generally can anticipate a recovery – sudden or more gradual – China has particular problems.  Even before this virus came to Hubei, that economy faced difficulties. Rising wages and the trade war with the United States had already convinced many producers to diversify their operations outside of China.  Domestic Chinese firms had begun to move to Vietnam and like spots to find lower wages and avoid American tariffs. U.S. producers had begun to move away for much the same reasons and also temper their willingness to source supplies and parts from China.  Producers in Europe and Japan had begun the same processes. Covid-19 doubtless has accelerated these trends, putting Beijing in a position that it needs a quick rebound. Even then, the best China can hope for is a slowdown in these diversification trends.

China’s government has made an effort to force a rebound.  It has ordered the three state banks to advance more loans to business.  Beijing has lowered taxes on small businesses and commanded its banks to offer them loans at special low rates.  Such gestures might accelerate a rebound should Covid-19 dissipate quickly, but they can do little if the disease lingers.  For the West, even for perennially slow-growing Japan, things should pick up in time. China has much more constrained prospects.