As infections accelerate in South Korea, Italy, and Iran, policy makers are wondering if the COVID-19 virus is escalating into a pandemic and market participants fear that it could hit the global economy hard enough to knock it into a recession.
Traditionally, a pandemic is an infectious disease epidemic that crosses borders. Paradoxically, the World Health Organization, which is charged with coordinating international efforts to stop pandemics, has stopped using the word. Officially, COVID-19 is a Public Health Emergency of International Concern, or PHEIC (which, appropriately, sounds like a sound someone who has it might make).
The number of confirmed COVID-19 cases, approaching 80,000 as I write, is far bigger than past viral outbreaks like SARS or MERS. And with Italy closing schools, theaters, sports matches, and even the Venice Carnival, the economic impact is growing.
How big could the economic hit of COVID-19 eventually be?
History as a Guide
In 2017, the World Bank launched pandemic “catastrophe bonds” to speed financing to countries hit by cross-border, large-scale viral outbreaks. At the time, it estimated the cost of a moderately severe to severe pandemic at roughly $570 billion, or 0.7 percent of global income in the year in which it is experienced. It defines pandemic as causing at least 250 deaths in the primary country and 20 deaths in a second country.
A 2019 Global Preparedness Monitoring Board report warned that there is a real danger of a fast-moving, lethal pandemic that could kill 50 to 80 million people and destroy 5 percent of global GDP. Based on the World Bank estimate of global GDP at around $86 trillion in 2018, that would be more than $4.3 trillion.
So far, the COVID-19 virus appears to be less lethal (with roughly a 2.8 mortality rate based on current –read rapidly changing– information, but varying widely depending on age and location) than either SARS or MERS but much faster spreading. It is “merely” highly infectious, with the worst mortality rates among people who are already ill or retired from the labor market.
A virus with the 34 percent-plus mortality rate of MERS that spreads as fast as COVID-19 would fit the World Bank’s nightmare scenario.
MERS killed 858 people, mostly in Saudi Arabia, for a mortality rate of over 34 percent. In Korea, where it claimed just 38 lives, MERS was estimated to have cost Korea over $12 billion as 16,000 people were quarantined and economic activity fell sharply. (I couldn’t easily find numbers on the impact on the Saudi economy.)
About 11,000 people died in the 2014 Ebola outbreak, which some estimated to have cost close to $3 billion in Guinea, Liberia, and Sierra Leone, were the virus was concentrated.
The Sudden Acute Respiratory Syndrome (SARS) outbreak, which like the current outbreak was caused by a coronavirus, killed 800 people –about a quarter of the COVID-19 death toll to date—with about a 10 percent mortality rate, costing $54 billion in health care bills and lost economic activity.
SARS lasted from November 2002 to July 2003. IHS Markit suggests some possible scenarios based on SARS, which knocked China’s GDP growth from the official number of10.5 percent in the first quarter to 8.9 percent in the second quarter, before the economy bounced back to 10.1 percent third-quarter growth and 10.5 percent fourth-quarter growth –at least by the official numbers. “The overall cost of SARS for China is sometimes estimated as high as 0.5 to 1 percentage points (in the counterfactual scenario),” it said.
How useful is SARS as a comparison to COVID-19? On an epidemiological basis, SARS had a higher mortality rate but lower transmission rate. And back in 2002-03, China was a much smaller part of the global supply chain and of the world economy. So the impact this time will be much bigger.
IHS Markit further points out that Chinese exports remained steady through SARS and benefited from a global economy that was emerging from recession. Retail sales and industrial production took the biggest hits, but recovered in the second half of the year.
Broader economic conditions this year are more concerning as well. The global economy is on the waning end of a record-long expansion, with dangerous debt levels and high uncertainty. COVID-19 could accelerate an already highly likely downturn.
So far, estimates of the hit that Chinese economic growth will take range from 0.2 to 0.8 percent, depending on whether the outbreak slows as spring arrives and temperatures increase, much as happened with SARS. (Note: I’m not saying that this outcome is a given, though I sure hope so.)
The IMF predicts that COVID-19 could reduce China’s GDP by 0.4 percent to 5.6 percent this year, below the psychologically important 6 percent number. That would knock 0.1 percent off of the global economy. But that’s assuming the outbreak is contained quickly and that economic activity bounces back in the second quarter.
“But we are also looking at more dire scenarios where the spread of the virus continues for longer and more globally, and the growth consequence are more protracted,” IMF Managing Director Kristalina Georgieva told G20 finance ministers and central bank governors on February 22.
And what of the market impact? At first, the virus briefly knocked down share prices in recent weeks before US markets bounced back up again. Until this morning, that is: when news of the increasing spread outside of China dealt US shares a wallop.
Investors had hoped to see a quick “V-shaped” recovery but now are thinking it’s more likely we will see a “U-shaped” recovery -that is, one that scrapes along the bottom before turning quickly back up, like the SARS effect.
Odds are that markets will continue to bet on central bank support and that this correction, like all the recent ones, will turn out to be just a temporary blip in insanity. Bad news is good news for investors who believe that the Federal Reserve and other central banks will do anything to keep share prices from tanking.
But interest rates can only fall so far. And at some point, central bank asset buying will finally send share valuations so far out of touch with reality that all the money printing in the world will not save them.
This article is part of my new LinkedIn newsletter series, “Around My Mind” – a regular walk through the ideas, events, people, and places that kick my synapses into action, sparking sometimes surprising or counter-intuitive connections.
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