The impact of COVID-19 on the Global Economy
The Virus - COVID 19
WHO announced this week that the fatality rate from COVID 19 is 3.4%, over 30 times deadlier than the flu. The death rate is more than 20% for the over 80s. The emerging consensus among epidemiologists is that the most likely outcome of this outbreak is a new seasonal disease, a fifth endemic coronavirus. With the other four, people are not known to develop long-lasting immunity. If this one follows suit, and if the disease continues to be as severe as it is now, “cold and flu season” could become “cold and flu and COVID-19 season.” In China 70% of people seem to contract the disease. The Harvard epidemiology professor Marc Lipsitch predicts that within the coming year, some 40 to 70 percent of people around the world will be infected with the virus. The current global population is estimated to be about 7.7 billion. If we had a true pandemic, and 40% of people contracted the disease at a fatality rate of 3.4% we are talking about more than 100m deaths. And they are not even the most pessimistic figures. At this early stage it is very hard to imagine a scenario like that but it emphasises how it is no time to be complacent, especially when we consider that the virus has already mutated once, according to the Chinese. It will like take at least a year to develop a vaccine and deploy it. If the virus can be contained until then perhaps the nightmare scenarios can be avoided.
The Economy - China: A Test Case
According to the OECD Covid-19 presents the global economy with its greatest danger since the financial crisis. Similarly the ratings agency Moody’s said a pandemic would trigger global and US recessions in the first half of the year. China is being viewed as a test case for how the rest of the world might tackle a significant outbreak.
Hubei, the epicentre of the outbreak, is one of 31 administrative divisions in China and accounts for about 5% of China’s GDP and population. The Chinese have confined 96% of deaths to this one region which demonstrates the immense efforts taken to restrict the spread. However the strict controls put in place to contain the virus comes with a serious economic cost.
For example, last week the New York Times reported that the ports of “Shanghai, Ningbo and Xingang — were clogged with refrigerated containers full of imported vegetables, fruit and frozen meat,” with only 60% of Chinas’ trucks reported as ‘working’ resulting in the build-up at the ports. In February Chinese car sales fell 80%, hotel occupancy rates dropped by 85% and flight bookings for March and April halved compared to a year earlier.
The effects of the shutdown are even visible from space with atmospheric pollution dropping sharply. It is difficult to see how the economic malaise will not expand into the second and third quarters of this year and we could be easily looking at the first official recession in China for decades.
The Global Economy
We are at the early stages of an outbreak outside of China but the economic impact is starting to be felt everywhere. 90% of the world trade is carried by sea. According to the American Association of Port Authorities first-quarter cargo volume at US seaports will be down as much as 20% from the prior-year period due to the coronavirus.
Italian Tourism Woes
Perhaps the sector that will see the biggest impact is Tourism. The industry is worth $1.7T globally according to the UN World Tourism Organisation. In Italy alone it accounts for 13% of GDP. MasterCard has said that cross-border travel, and to a lesser extent cross-border e-commerce growth, is being severely impacted by the Coronavirus. Ryanair have cancelled 25% of flights to Italy in March and April, Lufthansa have grounded a fifth of their fleet and Flybe has gone into administration after the UK government had earlier rejected a request for a £100m emergency loan. Up to 90% of hotel and travel agency bookings for March have been cancelled in Rome and up to 80% in Sicily. The Global Business Travel Association says the coronavirus could cost the industry some $47B per month. Airlines and package tour operators have painted an equally gloomy picture, with the International Air Transport Association predicting almost $113B in lost flight sales but this appears very optimistic given that that the revenue of commercial airliners was over $870B in 2019. If other nations follow the Chinese example and shutdown cities, tourism will be devastated.
But it's just the flu!
Governments are desperate to avoid panic so they have been downplaying the seriousness of the disease to some extent. Many people I have spoken to have likened it to the flu and scoff at the hysteria around the outbreak. But this is not the flu. Panic-buying of daily necessities has emerged around the world, tourist sites across Asia, Europe and the Mideast have been deserted, and governments have closed schools and banned large gatherings. In Paris, priests stopped placing sacramental bread in worshippers’ mouths and Iran suspended religious services on Friday, Islam’s main day of worship.
There is no doubt that COVID 19 has the potential to cripple the world economy this year.
The outbreak of Covid-19 in Italy triggered the fastest stock market correction on record, outpacing even the worst declines of the Financial Crisis in 2008. Prior to the move, markets had been complacent. There had been a dip in prices in January when news of the Coronavirus first hit, but global stock markets managed to recover and even make new record highs. The recovery was based on the assumption that the virus was largely contained in China and there would be an immediate V-shaped rebound in Chinese economic activity.
When the virus started to spread outside of China, the markets began to panic and investors have begun dumping stocks globally and rushing into safe-haven assets such as gold and government bonds.
Stimulus / Supports
Despite trying to maintain a certain level of calm among their populations the severity of the situation has not been lost on Governments and central banks. The World Bank said it would provide $12B to boost countries’ virus responses. The IMF pledged $50B in emergency funding for countries hit by the virus. G7 countries promised to do whatever it takes to control the outbreak. On Tuesday, the US Federal Reserve cut interest rates by 0.5% in a surprise move to calm markets. Rate cuts followed in Malaysia, Australia and Canada.
These efforts may be too little too late. Billionaire investor, Ray Dalio, believes this is ‘one of those once in 100 years’ catastrophic events’ that can devastate many sectors of the market and that emergency cuts to interest rates will be futile. No one knows for sure how this will all play out but I think global markets will be forced to price in a recession this year.