Let me begin this dispatch by emphasizing that I am not an expert in infectious disease or public health. What I want to try to do here is take some of what we know (or think we know) about the coronavirus outbreak and contextualize it a bit, because the daily tick tock of headlines on the subject can obscure the underlying picture. But these are just my impressions, nothing more.
A week or two ago I thought we were underestimating the potential damage of the epidemic, mostly because the reality of an economy the size of China’s being more or less shut down for a month had not sunk in. China accounts for about 16% of global GDP. It is the world’s largest manufacturer and exporter and sits at the hub of critical supply chains. Before the coronavirus outbreak it was already grappling with slowing growth in output and productivity, and with rising debt loads. The loss of a quarter’s worth of production and income could not help but be seriously disruptive to the global economy and dangerous for economic and financial stability within China.
But I thought there was a reasonable chance that China would manage to contain the virus, such that pockets of sustained infections would not pop up elsewhere in the world. I didn’t think it was a certainty, but I thought it was possible. It seemed to me in that case that we might be looking at a halving of Chinese growth over the course of 2020, a small but meaningful hit to global growth, and some real risk of Chinese financial instability (of the sort that would necessitate broad central-government intervention, and which could generate some real political troubles for Xi Jinping).
I suspect that ship has now sailed. You will have seen the very worrying news out of South Korea, Italy and Iran. I think, actually, the picture is worse than the headlines indicate. The problem is that confirmed cases and deaths are giving us a look at the lay of the land a week or two ago, not today.
Information on the virus is patchy, but what we have is suggestive. The CDC estimates a median incubation period for the virus of 5 days, though there are wide error bars around that, which is why the quarantine period is generally no shorter than 14 days. CDC further notes that, according to one analysis, the median period between the onset of systems and the development of acute respiratory distress is 8 days (for those who experience it; most patients don’t). Other reports suggest the gap between the first appearance of symptoms and hospitalization is only about 2 days. If these numbers are in the ballpark, the takeaway is that someone who dies of the disease was likely infected between one and three weeks prior. That is, many of the people who will be very ill two weeks from now have already been infected with the disease, even though they won’t develop symptoms or show up in official counts for another few days—perhaps as much as a week.
Italy and Iran first reported deaths from the disease just a few days ago, but the exposures which led to those deaths mostly likely occurred a week, or two, or three, before that. It isn’t clear where all of the patients who have died in those countries were exposed to the virus, and neither do we know for sure whether people who aren’t experiencing symptoms of the disease can pass it to others. But a lot can happen in a few weeks, especially in a country like Italy, which has open borders with the rest of Europe and a massive tourism industry. I could be wrong, but I suspect that a week from now it will be very clear that this is a pandemic, with significant outbreaks on every populated continent.
What does that mean? The good news is that the virus is not exceptionally lethal. Estimated death rates vary, but the highest ones reported (in Wuhan, the rate is estimated to be just over 4%) are well below that for SARS (10%) and vastly lower than for a disease like Ebola (above 80%). The problem is that the coronavirus (officially, SARS-CoV-2) is far more contagious than those killers, and so even with a relatively low death rate, a pandemic could take a terrible human toll. For context: the H1N1 outbreak in 2009 may have infected more than a billion people around the world, and so despite the fact that death rates for the virus were only around 0.02% it killed more than 200,000 people. At a death rate of 2%, even if only 1% of the world’s population contracted the coronavirus the human toll would top 1m people. Now, we may discover that the death rate is actually much lower—perhaps because mild cases have been dramatically undercounted. There might be unexpectedly rapid progress on a vaccine or on other treatments. On the other hand, the disease is likely to make its way to countries less able to manage a public health crisis than China or Italy. If the extent of the virus were to approach that of H1N1, the human cost would be horrifying to contemplate: in the tens of millions.
Interestingly, the lag issue could mean that China’s response—a massive lockdown relatively early in the course of the epidemic—was, though badly handled, a reasonable approach to trying to contain the virus. Because once you’ve got a lot of cases outside the initial location the horse is out of the barn. The question for other governments which have not yet seen many infections is whether there is still time to do any good by shutting everything down in an attempt to limit transmission. Some may be tempted to try it. But I would guess that the horse is out of the barn pretty much everywhere.
Still, even in particularly bad scenarios, this would not appear to be the stuff of post-apocalyptic thrillers. But the ravages of the disease itself are only one of the things that we need to consider.
It is generally a good idea to treat Chinese data with extreme caution. Even so, it appears that the number of new cases in China is declining steadily. But China now has a serious problem on its hands. If indeed the spread of the disease has been checked, that is due, in large part, to the near-shuttering of the economy over the past month. Beijing is understandably eager to get things up and running again. But now there are serious outbreaks elsewhere in the world. Operating the economy at anything like its normal level therefore opens China to the very real possibility of infections flowing back into the country, and triggering a whole new phase of the epidemic. And even if China were to completely ignore that threat, getting back to 100% operation would be very difficult given the outbreak-related interruptions now coming to other large economies and Chinese trading partners. It is hard to picture a scenario in which China does not continue to operate well below its capacity for at least another month: and you can add to that every day the global spread gets worse rather than better.
Of course, as costly as an idled China is, the rest of the world features in the picture now. And honestly, we have very little idea how this is likely to play out. In terms of the nature of what we’re facing, well, it’s a supply shock: a reduction in the capacity of the economy to produce goods and services, as opposed to a drop in people’s willingness to spend. Shuttered factories, canceled events: those all represent obstacles to the creation of GDP. When you say supply shock, those who think of anything tend to think of the 1970s and the aftereffects of the oil crises. But as I explain in my most recent column, many—and perhaps most—supply shocks don’t look like that. They are more likely to feature shattered confidence, tumbling stock prices and deflationary pressures.
But where we generally know how to deal with demand-induced deflation—by throwing a lot of fiscal and monetary stimulus at the problem—we’ve got much less of a handle on what to do when it’s a supply problem. It doesn’t matter how much newly printed money you put in people’s pockets if there are no stores open and no trucks to supply them anyway. Markets, I think, have taken a certain degree of reassurance from the fact that governments, and central banks especially, have been ready and waiting with stimulus whenever markets turn a little wobbly. But it’s one thing to rev up the economy when jobless workers are desperate to get back on the job and quite another when workers aren’t sure they want to leave the house.
Beyond that, we are in uncharted territory. The world has never experienced a supply shock with this disruptive potential in the era of hyperglobalization. We don’t know how large-scale supply disruptions will cascade across the supply chains that have grown up over the past few decades. We did see major trade disruptions during the global financial crisis, but those were the product of financial meltdown and demand collapse; it is hard to extract useful lessons from the experience. We don’t know the degree to which supply-chain interruptions lead to a permanent change in trading patterns: like a more complete decoupling between America and China. You might think that the answers to these questions depend on the extent to which governments opt for draconian restrictions on economic activity in an effort to slow the disease’s spread, and that’s true up to a point. But if fewer restrictions mean more infections, then a high degree of disruption is more or less inevitable. People—those who are able to, anyway—will stay home.
What else don’t we know? We can’t be sure where the financial-sector tripwires are hidden. They are out there. Over the past few years there has been a *lot* of hard-currency borrowing, much of it in emerging markets, not so much by sovereigns but by corporates and investment funds. A major economic slowdown and a surge in the value of the dollar driven by safe-haven flows, even if short-lived, could squeeze some of these borrowers to bursting. In English: imagine a Brazilian company which issued a bunch of dollar bonds because it could get a ridiculously low interest rate. Suddenly, people aren’t buying what the company is selling, and meanwhile the rise in the value of the dollar against the real means that the burden of the debt is increasing by the day. That’s bad news for the company, bad news for the Brazilian government, and bad news for everyone holding the bonds.
Or consider the recent, massive growth in borrowing by non-bank financial institutions, or “shadow banks”, which include entities like pension funds, insurers and hedge funds. Much of this borrowing is opaque, channeled through tax havens like the Cayman Islands. Or how about foreign purchases of collateralized loan obligations: securities backed by bank loans to businesses, lending standards for which declined steadily over the past few years. For some time, financial economists have gestured at these developments as things to keep an eye on—not imminent dangers, but not confidence inspiring either. But if there were to be a significant economic shock, which spooked markets and dried up dollar liquidity and left borrowers strapped, then maybe dominoes start falling.
Which is not to say that it’s time to panic. It is to say that the global financial system is impossibly complex and inevitably stores up risks that are difficult to identify and assess. That’s just one of the reasons, by the by, that we should have been far more aggressive in our regulation of the financial system post-crisis, but I digress. We don’t know what’s coming, and it could be that the financial effects are the absolute least of our problems. But shocks do tend to expose financial weakness, and big shocks expose bigger weaknesses.
Ordinarily, one might argue that as bad as the potential disruptions seem, economies are often flexible enough to adjust to problems and limit the damage. Had the outbreak stayed contained to China, that might have proven to be a mitigating factor. Obviously firms that put the entirety of their supply chain in Asia, centred on China, can’t turn around tomorrow and produce somewhere else. But there would have been some capacity for some producers to change suppliers, rely on inventories for a bit, and muddle through. That option is increasingly off the table, however. Where should you redirect your activities? Companies have to be aware that having identified replacement suppliers those substitutes might themselves be taken offline in short order.
There is also the chestnut that activity which doesn’t take place now may simply be pushed back to some future quarter rather than destroyed all together. In some cases that’s true; somebody who needs to buy a washing machine but who can’t right now isn’t going to give up on ever getting a new washing machine. They’ll just wait until things blow over. But economic activity in the world’s large economies is dominated by the service sector, and lots of output there won’t be made up. Restaurants can’t make up lost sales by turning tables over twice as fast and running all night, if you see what I mean.
There will be some offsetting effects, at least on the demand side. Countries will spend heavily on health care, law enforcement and other pandemic-related needs. I would say though—keeping in mind that there is huge uncertainty about all of this—that if indeed we are now facing a pandemic there is a good chance that the global economy will contract in the first half of 2020.
What’s really strange to consider is that even if the coronavirus becomes a full-fledged global pandemic, with tens or hundreds of millions of cases around the world, the worst of it may well be winding down by the summer. And it is possible, then, that the world economy could bounce back in fairly robust fashion. For that to happen, though, we need to get through the difficult first half without anything important breaking. Breaking could mean financial knock-on effects. It could mean the onset of a severe demand-side recession that policymakers struggle to combat. It could mean accelerated deglobalization and the start of a new era for the global economy. But the scariest kinds of breaking are all political in nature.
What you want to see in a situation like this is calm, competent leadership. You want governments to cooperate with each other, to share information and resources. You want leaders to behave in a deliberate, purposeful manner to get health services and materials where they need to be, to keep the public informed, to ensure that the shelves stay stocked and the streets stay safe and that no one, at any level of government, overreacts in a way that could create panic. You want the government to ready itself to deal with any economic or financial knock-on effects, to be prepared for potential hazards and to keep the public abreast of what it is doing and why.
What you don’t want to see are policy choices that seem ill-considered or which are poorly explained. You don’t want to see actions that could be construed as politically motivated. It’s an election season in America, and paranoia is already high. Careful leadership does everything it can not to inflame mistrust or to undermine the integrity of a democratic process that is already under threat. You don’t want to sow fear among vulnerable segments of the population. You don’t want people to be afraid to go to the doctor or speak truthfully to public officials.
I’m not going to describe the gloomier of the potential scenarios we face. You all know what the climate is like. You know that around the world there are political groups and politicians that would be more than happy to use this virus as a reason to promote xenophobia, authoritarianism, and social discord.
What I will say is that we, individually, have the power to remain calm, to be generous with others, to refuse to be taken in by efforts to widen social divisions, and to not let fear increase our tolerance for the unaccountable exercise of power.
And furthermore, it is because of moments like this that it matters who occupies high office, and it matters whether people have faith in their civic institutions or not. It isn’t costless to undermine faith in government and the importance of truth. It isn’t costless to elect incompetents because it annoys your political rivals. It isn’t costless to trash the public goods that exist to see societies through moments like this. So now we bear the costs. Let’s hope they are not too high, and that we are able to learn something from them.