What is the Economic Impact of a Mild Pandemic?
At the Last Futurist, we’ve been thinking a lot about the economic impact (Japan) of the coronavirus on the world in the first half of 2020.
Japan could be a key indicator when it comes to predicting a pandemic-level spread of the deadly coronavirus, — former FDA commissioner Scott Gottlieb.
If Covid-19 scales into a mild pandemic with further outbreaks outside of China, it’s likely to be an economic event of bigger proportions than is currently being touted.
Community transmission is taking place in at least 5 countries outside of China as of February, 2020. At least two of those instances show adequate containment. The other three, not so much.
We know that information censorship leads to more conspiracy theories and information panic which leads to less travel, tourism and avoidance of infected areas (and stigmatization of their people). Tourism in South-East Asia is already suffering from a lack of Chinese tourists which is very serious for Japan, Thailand and other countries there.
With the American Government not trusting Chinese numbers, there’s a wide degree of uncertainty with how serious covid-19 actually is, and whether it can be contained to just China. The WHO is cautious to protect China’s reputation on the world stage, fueling speculation that the real numbers are much higher than official numbers.
The WHO says it’s too early to tell if further outbreaks will occur. It says 80% of patients show mild impacts. The majority of the 5% of critical cases are people who are older and those with pre-existing conditions. Yet the sample size remains clouded in uncertainty due to China’s historical lack of data transparency.
U.S. officials’ mistrust of China goes as far back as the 1950s, when national authorities set unrealistic production quotas that led local officials to inflate data. China’s Huawei cyber-security debacle and accusations of rampant IP theft in recent years hasn’t helped a low trust level in China’s approach to information control and sharing verifiable data. Internal reports and academic simulations of the virus spread have both contradicted reported numbers.
Economic Impact of Mild Pandemic Underestimated
This isn’t SARS, a lot has changed in the global economy in 13 years. Of the industries affected by the mild pandemic, perhaps none will be hit as hard as travel. In recent weeks, hotel occupancy in China has fallen by 45% year-on-year, according to analysts at Citigroup, a bank.
- China is even sterilizing cash in an attempt to stop the coronavirus spreading
- Wall Street is convincing itself that China will bounce back relatively quickly, which is absurd since the mild pandemic is not contained within China.
- Singapore and Japan are possible new outbreaks outside of China, both sharing fragile economic data in the week of February 17th, 2020.
A retail wave of bankruptcies is likely to hit soon. Singapore’s Ministry of Trade and Industry downgraded its forecast range for the change in the country’s annual gross domestic product to between -0.5% and 1.5%.
The economic impact on small businesses and small vendors inside of China is hard to even tabulate. But as a mild pandemic that has the potential to spread, Covid-19’s true economic cost remains still unknown.
Japan is the Black Swan Event After Economic Impact on China
Japan itself is the the world’s №3 economy and could likely face recession as the outbreak takes a toll on tourism. Certainly if the Tokyo outbreak spreads to other major Japanese cities. Japan does not have the valuable SARS experience countries like Taiwan does, and appears to lack a capacity to act quickly in the critical first few community transmission cases.
With media attention on the Diamond Princess, with those cases Japan has over 400 cases outside of China. Japan’s economy has shrunk at fastest pace in 6 years, and the mild pandemic clouds its outlook further.
Singapore and Japan remain probable cases to follow China into black swan territory. the impact on China alone is a disaster considering how integrated global supply chains are with China and neighboring South-East Asian countries.
As for Wall Street’s reaction to Covid-19, I’m not sure its algorithms could have predicted it would become a mild pandemic. So the former consensus was simply that like in 2003 when SARS gripped the nation, China will rally to a V-shaped recovery. There’s increasing speculation that stance was technically wrong.
China’s economy was already made vulnerable by a trade war with the U.S. China’s economy is growing much more slowly now (GDP growth has recently been about 6%, according to the government, compared with 10% in 2003), and the banking system is far more fragile and laden with debt. This mild pandemic is causing prolonged conditions of a freeze on many industries and marked down activity from factory workers, to travel, tourism, retail and small business loans.
Will Covid-19 Test our Economic And Banking Systems?
What does it all mean? Central banks will have to further push liquidity up to prop up an already fragile global economy. There are still significant unknowns about the severity of the spread, yet the markets are not reacting to the uncertainty at appropriate levels. If a community outbreak will occur in the U.S. things would change drastically and quickly. The CDC itself has been preparing for that (almost) inevitability.
Singapore, Hong Kong, China and probably Japan will be severely impacted by the mild pandemic. Containment could take additional weeks and the chances of spread to other vulnerable countries is now considered high. This isn’t just a serious outbreak like the WHO says, it’s a mild pandemic since community spread is now occurring in Japan.
China’s credit rating among businesses will be trending down, where corporate debt was already a significant problem before the mild pandemic spread in Hubei Province and elsewhere. Creditworthiness of the Chinese banking system has been trending downward, especially at the lower end, and there are logical reasons to believe this will get worse before it gets better.
The Guardian wrote about how the coronavirus could take the form of a black swan event for the global economy. This position was reproduced on Medium as well. Airlines have grounded flights, banks have sent staff home and factories aren’t working at anywhere near optimal capacity in China. What if the mild pandemic does the same to more countries?
I think it’s safe to say that the outbreak is having a significant impact on China’s economy and may potentially affect the global economy. Economists and central banks will have to follow this story closely as even if cases have peaked within the central outbreak region, new outbreaks may be occurring in major cities like Tokyo, Beijing, Shanghai and so forth. If more major urban centers are infected, community spread to other countries becomes more probable.
The economic impact of a mild pandemic like Covid-19 could be significantly higher than SARS. SARS was contained and didn’t have an R naught over 2.5. There’s increasing data it’s higher than the 2.2 figure, the so-called R naught of the disease, a mathematical equation that shows how many people will get sick from each infected person. It could be as high as 3.0. and that’s approaching mild pandemic levels.
Is Covid-19 Disease X We Have Been Preparing For?
As the virus goes through more generations of spread, the chances of it mutating also increase. China’s health minister, Ma Xiaowei, recently told reporters there is evidence it’s already mutated into a stronger variation that is able to spread more easily among humans. Will stronger versions be airborne instead of just droplet transmission based? Entire lock-down regions being sprayed appears to tell that story.
Bill Gates and the WHO have talked in years past about a Disease X referred to “a serious international epidemic caused by a pathogen currently unknown”, said WHO. In 2020, it appears Covid-19 bears some striking resemblance with such a Disease X.
Humanity has no internal immunity to it, as we’ve not seen it before. There won’t be a vaccine for at least one year. Oxygen in Hospitals is the only real treatment for serious cases, however if infection overwhelms healthcare systems, mortality rates become much higher than the 2.5% mortality rates we see as a whole.
The risk to poorer countries such as African nations, Indonesia, Philippines and India is very high. Many of which didn’t have the capacity to even test for Covid-19 in a timely manner.
Economists expect the People’s Bank of China to step up its liquidity measures to ease funding conditions in Chinese money markets to combat downside risks posed by the infection. However it’s not clear how long China will be impacted by the spread of Covid-19 and the disruption to daily normal business life. Travel bans and quarantines are not effective means to stop a virus, only slow it down.
Even with experience with SARS, Singapore already has 70 cases. This indicates community transmission is difficult to trace via contacts when cases exceed around 50 cases. In the West with cases under 20, it’s relatively easy to stop potential outbreaks in comparison. Even if Covid-19 just becomes a mild pandemic of East Asia, it will still have devastating economic impacts that could last for months, not weeks.
China’s Corporate Debt Problem is an Added Risk Factor
China’s bad debt problem and corporate debt fragility is very serious. S&P research estimated that if this crisis is prolonged, bad debt in the banking system could increase from 2% at the end of last year to over 6%. What do you think would be the ramifications of that? A corporate debt bubble is likely where China’s banking system is heading.
World health authorities have spent a lot of time and money making plans for dealing with the next major outbreak, but it’s never enough. Nobody thought Disease X would be a coronavirus. Covid-19 attacks the organs of vulnerable patients who are elderly and have pre-existing conditions. Medical workers are particularly at risk. In several cases outside of China, taxi drivers, doctors and cruise ship occupations are among the most vulnerable.
Why Covid-19 is a Mild Pandemic and Black Swan Event for the Economy
Whether on the Diamond Princess or in Singapore or Tokyo, transmission rates are rather high. At the end of January, the WHO estimated that the R naught of the virus was between 1.4 and 2.5. An R naught, or R0, rating of 1 means the average person infected with the virus will spread it to one other person. Many virologists now believe Covid-19 is on the upper end of this spectrum.
There are some academic papers emerging suggesting the R0 is actually well higher than 2.5. They suggest the the R0 value is likely to be between 4.7 and 6.6. Please read it here if the topic interests you.
The Wuhan exodus before the lock-down of January 23rd and a similar expected exodus migration out of Japan is likely to further the spread of Covid-19. What if the early economic data out of China due to Covid-19 spreads to other countries?
What Areas Will be Most Impacted of the Economy?
- According to travel data and analytics firm Cirium, more than 85,000 flights touching China have been cancelled in the three weeks since the outbreak closed Wuhan airport on 23 January, the vast majority of which were domestic.
- Luxury goods, retail, tourism and local businesses are among the hardest hit as well as consumer sentiment.
- While Covid-19 can spread through contaminated objects, the duration of virus survival on currency notes is not determined. It’s not just our hands or infected objects, but physical money as well that’s dangerous in a mild pandemic.
- Factory shutdowns and supply chain disruption. Data company Dun & Bradstreet say an estimated 5 million companies have Chinese suppliers — from Apple, whose supplier Foxconn postponed the reopening of its Shenzhen factory, to food companies Kraft Heinz and PepsiCo, which have closed Chinese factories.
- If Covid-19 is a prolonged pandemic of months and not weeks, the economic impact won’t just be a “speed-bump”.
China’s other financial-system struggle over the past year was ensuring that private-sector companies, mostly small and medium-size enterprises (SMEs), were getting adequate funding. Now this is really in doubt with corporate debt among the lower end private sector likely beyond repair in many cases.
What would a corporate debt bubble bursting look like for China in 2020? With a mild pandemic on the loose we might find out.
A lot of these companies used to get financing from China’s shadow-banking system, so when authorities cracked down on that in 2017 and 2018, they got squeezed. Then there’s currency manipulation tactics and flooding the system with liquidity. China’s bizarre morality with regards to social stability might be its downfall in light of how easily this coronavirus spreads.
Automobile Sector Woes Ahead
- China’s automobile market: The outbreak could barely have come at a worse time for struggling carmakers.
- France’s Renault and Peugeot, Germany’s Volkswagen and BMW, as well as Jaguar Land Rover, Britain’s largest carmaker, have still not reopened factories run with Chinese partners.
- The global automobile market is already so dependent upon consumer sentiment in China, this will be a huge year for electric vehicle adoption.
If we consider the 1918 Spanish flu pandemic, which had an R naught of about 1.8 and killed at least 50 million people across the world. The current R naught of the new virus is may be higher than the 2003 SARS outbreak, which had an R naught of between 2 and 5. If you as a coronavirus you are 80% simliar to your SARS cousin, the severity of the virus has likely been undereported to stem global panic and promote social stability within China.
This means its business impact would correlate with being a permanent mild pandemic that will likely experience community transmission all over the world gradually (since travel bans do slow it down).
The longer Covid-19 is active, the deeper its impact on the global and Chinese economy. Hong Kong, China and Japan and most of Europe already had weak signs in their economies. If Covid-19 spread to Germany it would be particularly bad for Europe.
The Improbability of Containment and Black Swan Emergence
At present, health services are trying to contain Covid-19 using case detection, isolation and prevention of onward transmission. However these methods only work up to a certain point, as Covid-19 evolves into mild pandemic territory, those methods will become obsolete and outdated.
By that time the narrative of Covid-19 being a “Black Swan” event for the global economy will be full-blown. Measles, one of the most contagious viruses in the world, has an R naught around 12 to 18. While the new coronavirus is milder, by comparison, what physicians have seen so far is still concerning.
Researchers from Lancaster University in England estimated the virus’s R naught may be closer to 3.1. Increasingly data suggests the true contagion of Covid-19 is higher than the range WHO initially put forth which raises some serious concerns over data transparency and the scientific basis of official stats. The public is likely not being told the true numbers of the most up to date computer simulations on the mild pandemic Covid-19.
Coronaviruses, with SARS and MERS among that group, are infections of the respiratory tract that can lead to illnesses like pneumonia or the common cold. We have no immunity to these, being young is the best protector. Our inter-connected world and decentralized global economy is actually a risk-factor to black swan events like pandemics.
The trend is as Covid-19 impacts more countries, it becomes gradually harder to contain. Once community transmission occurs, it begins to spread to other cities. It doesn’t matter how well China contains it within Hubei province if transmission is occurring locally in Singapore, Tokyo, Hong Kong and could spread to new locations.
Few dispute that Covid-19 is less contagious than SARS today. The mortality rate increases as systems are unable to provide oxygen to emerging cases as occurring within the Wuhan epicenter. This means in cities in Africa or South-East Asia without proper medical systems, the mortality rate could be much much higher than the baseline 2 percent.
Impact on Small Businesses and Medium Enterprises Will be Immense
Banks cannot bail out SMEs forever though, as if covid-19 persists for many weeks, the system breaks down. Several of the big banks, including HSBC and Standard Chartered, have unveiled plans to help struggling small businesses, waiving fees on credit card payments and allowing interest-only loan repayments.
- Oil markets. The economic slowdown has dampened commodity markets, particularly given China’s key role as the driver of demand growth.
- SMEs that don’t have existing relationships with Banks will be particularly hard hit in China and elsewhere where Covid-19 goes.
- The cost and disruption of schools, factories, airports and retail centers shutting down or only partially opening is going to be incredible complicated and expensive.
China in a sense is just a test pilot of what Covid-19 could become if its achieves outbreaks as a mild pandemic. A majority of scientists already believe it is a mild pandemic. This is because community transmission has taken place on multiple continents.
With the impact of trade wars, Brexit and various geopolitical issues, the global economy has been going through a hard time and the possibilities of recession and economic slowdown felt very real at certain critical points of 2019. Just as those fears receded a new one emerged. It’s today clear that covid-19 could represent a serious economic recession black swan event for 2020.
We are just 10 weeks into the spread of Covid-19, relatively early in the game. As the focus shifts from Hubei Province to potential secondary outbreaks, it’s not just a waiting game, we must evaluate the risks and dangers to various segments of the economy, supply chains, retail, tourism, SMEs and so forth.
The economic impact of a mild pandemic would be more severe than we realize, because our global civilization has never experienced one. It’s a potentially unprecedented event in a globally connected human society. It’s not simply the loss of life that’s dangerous per se as a global public health crisis, it’s actually the disruption to the global economy for the rest of citizens.
Economic Risks to Watch for in Early 2020
The economic risks are industries impacted are outside the scope of this article but at least include thus far:
- Luxury Goods
- Supply Chains
- Movie Box Office
- Tourism and related industries
- Factory workers & conditions
- Impact on Small to Medium Enterprises (SMEs)
- Credit and corporate debt
- Trust in Government and social instability
- Public Health costs
- Cost of quarantines
The economic impact finally won’t be comparable to SARS 13 years ago because SARS was contained and Covid-19 is not likely to be contained in the Winter of 2020.
In 2003, the Chinese government was accused of trying to cover up the outbreak of Severe Acute Respiratory Syndrome, more commonly known as SARS, which rapidly spread to more than two dozen countries and caused world health officials to declare it a global health threat. Clearly for Hubei Province, Covid-19 is much worse than that.
The CDC can’t be in all places at once, and wasn’t even let into China to do its best work. This meant that local transmission with the Wuhan migration of the Lunar Festival holidays super-charged transmission of the novel coronavirus in ways that augmented its spread far beyond the severity of SARS.
Scope of Mild Pandemic’s Impact on Business Grossly Underestimated
New studies are pointing to how serious the economic impacts could be. The Coronavirus could impact 5 million companies worldwide, new research shows. If the mild pandemic continues into the Spring and Summer of 2020, hundreds of thousands of SMEs will go out of business.
Already in February, 2020, Dun & Bradstreet researchers found that at least 51,000 companies worldwide, 163 of which are in the Fortune 1000, have one or more direct or “tier 1” suppliers in the impacted region. China’s importance for consumer sentiment and supply-chains cannot be overestimated.
China’s GDP could contract by 0.5 to 1% in 2020, given what we know today. For Hong Kong, Singapore and Japan it could be worse, that’s what the data is telling us. There is already evidence albeit anecdotal — that supply chains are being disrupted, including outside China.
It’s disappointing to read that Dr Tedros Adhanom Ghebreyesus announced trends of lowering figures of infections, even as new cases grow quickly in Singapore, Beijing, Shanghai, Hong Kong, and Japan. Because in a sense the Chinese data gives us false hope. The epicenter could get better, but that does not mean the mild pandemic is over.
Five Major Sectors Most Impacted by Coronavirus
The Dun & Bradstreet report identified that the top five major sectors, accounting for more than 80% of businesses within impacted provinces, were services, wholesale trade, manufacturing, retail and financial services.
- Wholesale trade
- Financial Services
If you work in those fields, the mild pandemic of covid-19 is likely going to impact you in 2020. If you are a consumer in affected regions, you might experience other impacts as well as the social disruption of fear and odd human behavior.
China is too big a player in the global economy for this not to have a dire economic ripple effect. Think about it, the Chinese economy constitutes today in 2020, around 20% of global GDP (gross domestic product).
Many analysts estimated that if containment of the outbreak is delayed beyond the summer, the “cascading effect” might cause a drag of around one percentage point on global GDP growth. I think that’s a rather conservative estimate.
Global GDP Could see a Missing Percent in 2020
One report estimates that a pandemic could cause an average annual economic loss of 0.7% of global GDP — or $570 billion. But these are early figures not considering the potential of further outbreaks outside of China, now probably occurring in Japan (February, 2020).
The economic modelling takes SARS for its baseline without understanding that those comparisons are not appropriate. SARS was a small epidemic whereas Covid-19 is a mild pandemic. Therefore it’s economic impact must be adjusted as we go, as we learn more about the virus’ spread.
As of March, 2020 the mild pandemic covid-19 will appear as if containment and eradication efforts were unsuccessful. Epidemiologists don’t control fiscal policy or political efforts, but they warned us quarantine and travel ban approaches were somewhat futile. We have to focus on the patients and economies, and not the disease. Because in a mild pandemic, to do anything else is not efficient.
Whatever the true stats are about the novel coronavirus, the impact on the economy of China and elsewhere is very real. A mild pandemic doesn’t go away easily, it spreads and must be faced with transparency and acceptance. As we learn more about the virus, we’re learning more about how fragile our human systems are in how interconnected we are in a global economy, since a virus does not respect national boundaries or travel bans.
Covid-19 is thought to have been introduced to human populations from the animal kingdom in November or December, 2019, as suggested by the phylogeny of genomic sequences obtained from early cases. We might not know the real economic impact until August, 2020 at the earliest.
No society can be prepared for a mild pandemic, especially not a globally connected one. Even North Korea which operates in a semi-closed way, is severely at risk to an outbreak. In fact they are more vulnerable due to a lack of medical supplies.
Covid-19 replicates efficiently in the upper respiratory tract and appears to cause less abrupt onset of symptoms, meaning it’s harder to detect. RO of over 3 and more difficult to detect and diagnose means quarantine is only a temporary slowing of events we know will occur.
According to the Lancet, Infected individuals produce a large quantity of virus in the upper respiratory tract during a prodrome period, are mobile, and carry on usual activities, contributing to the spread of infection. This suggests doctors and taxi drivers are the most likely to spread the virus to the general population, which is exactly what we are seeing this week in Japan.
You can use quarantines aggressively but all it takes are a couple of super-spreaders and a few community clusters to negate their impact in a given urban center. Migrations from further outbreaks replicates the Wuhan exodus and contagion spreads to most of the global cities around the world in a matter of months.
We need to get life back to normal, but as the risk of new outbreaks occurs, the new normal is one with a new coronavirus around. We’ll have to learn with it, instead of evangelizing obscure numbers and an uncertain economic impact.
Economies Cannot Prepare for a Mild Pandemic
The truth is countries have no idea how to prepare for the economic impact if the outbreaks spreads to their country. No country is fully prepared for a coronavirus pandemic, according to a public health experts.The same goes for highly interconnected economies and industries. We live in a global civilization and pandemics are part of that world.
To get an average R0 of under 4, the super-spreaders must be balanced by cases with very low R0. But as the early Wuhan outbreak shows, once the covid-19 as a disease accelerates, the system breaks down very quickly. If further outbreaks occur, we’ll have a better idea of the economic impacts according to those regions and economies.
Isolating all infected people in hospitals and tracing their contacts also works only if case numbers remain low. If this spreads in Africa, India or Indonesia it would easily be impossible to contain on the local level, and wealth inequality dictates the poorer countries of the world could be the hardest hit both in terms of their economies and fatalities.
What is the economic impact of covid-19? It could be a once in a century event. China is resilient by decades of growth, but other economies won’t be as lucky.
February 18th update: In Japan, a total of 606 cases of the virus, officially called Covid-19, have been confirmed in the country — the largest outbreak outside China.