As I prefaced my very first post on coronavirus-inspired issues – less than four weeks ago – “who knows quite what will happen with the current coronavirus”. No one does, and I certainly don’t claim any insight on that medical/epidemiological point. But there are serious experts in those fields now beginning to talk about the possibility – some put it much stronger than that – of it turning into something that infects perhaps 40 to 70 per cent of the world’s population (I gather that sort of incidence isn’t uncommon in past serious pandemics), with perhaps 1 to 2 per cent of those people dying. In that scenario – it is purely a scenario – something from 0.4 to 1.4 per cent of the world’s population dies. The middle of that range would be similar to New Zealand’s experience in 1918.
My interest here is in the the economic impact of such a scenario (and can I repeat, this is simply based on one scenario – with no probability attached, and one every sane person presumably hopes does not eventuate, but probably still the sort of thought experiment people in the economic agencies of governments should be thinking through, even just as a tail risk).
Perhaps a first stake in the ground is that even if something this bad happens, in a couple of years time the crisis would be over and something akin to normality would have returned. Societies would no doubt still be scarred by the disruption – economic, social, and perhaps political – and by the utterly unexpected scale of the human losses (the normal annual number of deaths in New Zealand is around 0.8 per cent of the population), perhaps in a way they don’t seem to have been in 1918 (coming off far greater death, destruction, and dislocation in the war). But borders would open, commercial premises operating, people free to come and go within countries as they like with no unusual fear etc etc. Health systems – potentially grossly overloaded during the crisis scenario – would be back to more or less normal either. In other words, most of the effects are temporary.
Readers will know that there are debates, with real world consequences, about the nature of the costs and losses associated with financial crises, and debates about whether most of the effects are temporary or more permanent. I can’t see how the overwhelming bulk of the economic effects of a even a very severe pandemic would be other than temporary. The pandemic won’t have been endogenous to our economic system (so it won’t tell us much about initial gross misallocation of resources), isn’t likely to affect innovation or incentives to innovate or invest, and isn’t even likely to have much impact on productive human capital (especially if, as at present, deaths are concentrated among the elderly). Perhaps there would be some persistent effect in dampening globalisation (reassessment of risk of cross-border supply chains etc), but the aggregateeconomic effects would take time to cumulate and spot, and be second-order relative to the near-term disruption.
But if we could be pretty confident that a couple of years hence things would be functioning more or less normally again – even if, as globally in 1918, there were several distinct waves of the infection – at the other end of the calendar, things would be characterised by extreme uncertainty. First, even if a scenario of the sort I’m dealing with here comes to pass, none of us it will know it for some considerable time. There would be duelling optimists and pessimists, each with plausible arguments and straws in the wind. And presumably none of us would know where the infection rate would surge next.
That alone is a recipe for economic paralysis: the rational response to extreme uncertainty (often quite well-warranted uncertainty) is to postpone (travel, investment, discretionary spending), delay, stick close to home etc etc (and that without the seemingly irrational responses we see reports of in New Zealand at present, of people avoiding Chinese restaurants). Even if air travel was still possible – it would quickly get much harder, as commercial imperatives (let alone regulatory ones) led to cancellations, and the rational prospect of future cancellations – the number of people willing to travel far or for long will drop away. Travel insurance also becomes a real issue. Who wants even a modest risk of being stuck for weeks, with a potentially life-threatening conditions, in some foreign hospital with doubts about your ability to pay. Nations will be reluctant to host lots of visitors who could fall sick while in your country, who – even with ability to pay, which not all would have – could further overburden a potentially severely stretched health system. As flights get cancelled, air freight is also disrupted.
We are already seeing the extent of social-distancing, cancellation of events etc – mostly not forced by governments – in places that currently have a relatively modest number of cases (Singapore, Hong Kong, and to some extent Japan). Imagine the demonstration effects when – this is a scenario remember – the next country, and one more transparent than China, gets a severe outbreak. And the next, and so on. (Scenario, remember.)
When such an outbreak happen, lets assume that no free country is going to be able or willing to impose such extreme lockdowns as the PRC has done. But you don’t need that level of lockdown for the level of economic activity to be savaged. Lots of people are sick in this scenario, in many cases really quite seriously ill, and typically (it appears) not just for a few days. Those people will need people to care for them (not necessarily medically, but just the comfort we’d all want to offer to a seriously ill family member). And between voluntary and semi-compulsory pressures, not that many people with a sick family member are going to be welcome in the office/workplace for a while. More than a few employees will find hours drying up, or jobs disappearing altogether. Sure, people still need to eat – though who knows how effectively distribution systems hold up – but there is a great deal of expenditure, business and private, that is discretionary (over a horizon of several months). At one extreme – long-term asset sales – for example, the Chinese data show the property market having dried up for now.
(There were estimates last week that regions accounting for more than 50 per cent of Chinese GDP were in lockdown. If those areas are operating at no more than half capacity for a month – stabs in the dark, but they don’t look implausible numbers based on (for example) charts like these – “true” Chinese GDP for this quarter could be 8 per cent lower than otherwise, when reported quarterly GDP growth is about 1.5 per cent.)
Now assume – as the scenario requires – that this isn’t just about one country, but about a steadily increasing number of countries. And start factoring in the serious disruption to supply chains – which we are already seeing in and from China (and recall that a supply chain isn’t much stronger, in effect, than its weakest link) – and there is lot more economic activity at risk, even if all the workers were available and ready to work.
In each and every country, lots of businesses – and more than a few workers – are going to be facing big drops in income. Initially each will like to think it is a matter of a week or two, but already that doesn’t really look like the China experience, and on this scenario, the problem has become worldwide. Plenty of businesses have debt or very very limited cash reserves and so lots of firms will soon be in the hands of their bankers. Responsible banks will want to stick by and support good longstanding clients, but there are limits (collateral values are likely to be falling, markets illiquid, even if temporarily), and banks themselves are likely to be affected by fresh waves of caution and risk aversion. Bank funding might start to become a bit on issue playing on the minds of boards and management.
Financial markets have proved remarkably sanguine about the coronavirus so far. Perhaps that makes sense if you believe the public-facing PRC story, that everything is coming under control before too many more weeks things will be getting back to normal. But that isn’t the scenario I’m working with in this post. In such a scenario, global uncertainty would be huge and uncertainty is the enemy of asset market valuations. Quite probably there would be some real high profile company failures (or big state bailouts) going on – airlines anyone? – short-term earnings estimates would be being savaged, and risk spreads would be widening I doubt any supervisory agency has stress-tested its financial system for a shock of the sort I’m using in this scenario, and even if the event wasn’t severe enough to pose a systemic threat (a) there would be a great deal of uncertainty, including about who had what exposures, and (b) this scenario would come on the back of a global economy with a lot of vulnerabilities, including in financial systems, anyway – the euro area economic performance anyone?
Perhaps the mitigating factor in all this is macro policy? Which is a nice thought, except that so many advanced countries already have official interest rates at zero, or below (few/none have more than a 200 basis point buffer, and in major past downturns – even shortlived ones – 500 basis points has been a not uncommon reaction). No doubt, fiscal policy would swing into action – in fact, you rather hope practical contingency thought is already going on. Even in highly-indebted countries, for a genuinely short-term shock (1-2 years) there is room for some additional spending. Some of it might even be effective – in eg retaining attachment to the labour market (some of the specific subsidies after Christchurch and Kaikoura), but it is hard to be that optimistic about the overall degree of effectiveness. Governments can cut taxes in short order and put more money in individuals’ pocket, but in this scenario risk-aversion, social-distancing etc, suggests that cash constraints won’t be the ones binding individuals. Governments can, of course, purchase real goods and services…..a common last-resort stimulus suggestion, but not one likely to work as well when it is a struggle to keep factories/shops open with staff turning up.
For New Zealand, one mitigant we could probably count on to help would be a lower exchange rate. Historically, global risk events tend to be really rather bad for the NZD (and the AUD). Export volumes and world prices might take a hit – savage in some cases – but what foreign exchange was being earned would generate quite a bit more income.
What about inflation? One sees various stories already about disrupted supply chains putting upward pressure on prices/inflation for manufactured goods. That seems plausible enough in some cases – if, as reports suggest now, there are disruptions to the flow of winter fashions to our stores, there is less likely to be excess stock for sales late in the season, and so on – but my sense is still that a scenario of the scale I’m writing about here is, on balance, a seriously disinflationary one. That is both because commodity prices would be falling – in some cases plummeting – but also because the hit to demand for the fear, uncertainty, delay, distancing, physical disruption, would exceed the disruption to supply (but that needs teasing out with further analysis) and the risks of inflation expectations taking a further downward hit is also real. This is the risk I, and others, have been highlighting for some years – that in the next serious downturn, people will quickly realise that policy capacity is much less than usual and adjust expectations accordingly. If that happened, it would risk severely impeding a return to full employment, even after the virus itself had passed into history.
This is all very speculative – and around a scenario we must all hope never happens. But we need policy agencies – and others, be it academics or other commentators – to be thinking hard about these contingencies, including thinking about what options (and when) make sense to deploy early to minimise, to the extent possible, the human and economic dislocations, which could be very large.
I’m wedded to very few of the arguments here, and would welcome comment/challenge (not about the probability – on which I have no particular view – but on the implications of a deliberately extreme scenario, even if one that more medical experts of warning us we could yet face). It would also be good to have a sense that the New Zealand governments was taking the issue and risk seriously and pro-actively planning. On what we see at present – which perhaps isn’t all there is – it looks like lethargic political leadership, as keen as anything on keeping Beijing not too unhappy, with not much sign that the bureaucracy is much more than reactive either (officials will, no doubt, respond to political incentives).
croaking cassandra 
China’s leadership is on the horns of a dilemma; continue the aggressive drive to contain COVID19 and risk stalling the economy and triggering the much-feared correction in the housing market (household debt levels and asset prices are highly inflated) and risk breakdown of supply lines (including food) with the resulting social chaos, or attempt to restart the economy at risk of allowing the virus to surge with little control.
It appears they’re attempting a middle of the road approach, locking down Hebei province and then using their propaganda and strong-arm tactics to try to force things back to normal in the hope that the outbreaks outside Hebei can be contained.
Having spent 20 years looking at China’s economy closely – including being China Economist for an investment bank – I expect the Party to do whatever is in the best interests of the Party, not necessarily the State. It’s hard to know what exactly that is, but my guess is that their concerns are shifting from public health to public finances and public security.
So they’ll take the risk…
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Sunlight or, more specifically, solar UV radiation (UV) acts as the principal natural virucide in the environment. UV radiation kills viruses by chemically modifying their genetic material, DNA and RNA.
It is often assumed that viruses pose a lower potential threat for use in biological warfare or bioterrorism than bacterial counterparts, because they are expected to persist for shorter times when released into the environment than bacteria
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1280232/
I am thinking that novel corona virus which developed in low UV exposed areas such as smog filled China cities hav a problem propagating widely in NZ. When I arrived back in Auckland, I was 6 hours in transit in Pudong on a China Eastern airline along my route. There were 300 chinese tourists/passengers coughing and spluttering around me. When I landed at Auckland Airport, there were thousands of chinese/asian tourists. It is rather hard to believe that NZ does not even have a single case of the virus.Within 10 days, it was a global panic with China shutting down cities.
Our UV radiation is 8 times harsher than most cities in China.
I do not think the spread in NZ would be anywhere as fast and we really should not panic. Perhaps we should advertise for travellers and cruise ships to come and bake in our harsh UV environment to cleanse their ships and passengers of viral infections from China or any other countries.
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Sounds plausible, with the caveat that they will presumably want to minimise the risk of being blamed for widespread serious outbreaks globally (such as might happen if they lifted a lot of their own controls early).
I’ve assumed the PRC will throw fiscal and mon pol stimulus at the situation, even at the risk of an eventual sharp exch rate adjustment.
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The biggest immediate risk NZ faces is that there are 400,000 people in NZ on temporary visas. Our work schedule is already contracting with the prospect many of the temporary work-visa employees being displaced and seek to return to their country of origin. Should there be a virus breakout in NZ and the displaced visa-holders are blocked from their country of origin what happens then. Very large call on the government welfare system. NZ needs to lock down its borders immediately
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Maybe work visas are like a safety valve; if as during the great depression there is extensive unemployment then those on work visas return home (as you say maybe not immediately). Whereas those who have residency are here forever. It is when recent immigrants are working and neighbouring Kiwis are unemployed that our sense of being a community is threatened.
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“”I can’t see how the overwhelming bulk of the economic effects of a even a very severe pandemic would be other than temporary. “”.
You are not using the adjectives ‘very severe’ correctly; read a few history books such as Jared Diamond’s ‘Guns, Germs & Steel’ and ‘Collapse’. The pandemics that Europeans introduced to the Americas killed over 90% of the population and enabled once mighty empires to be conquered by a handful of men on horseback. Note the more civilised the people the more deadly a pandemic so the surviving Red Indian tribes of North America are mainly the ones who were most warlike and considered primitive by other tribes. According to encyclopedia.com for my wife’s tribe: “”Probably 80 to 90 percent of the population died from epidemic diseases during the first fifty years of contact””. European/Asian origin pandemics were deadly for peoples with no natural immunities. The tropical climate was some kind of revenge – it is said during the first fifty years of Christianity in Papua more missionaries died than converts were made (eventual success being the work of Tonga and Samoan missionaries).
I am not particularly concerned by the threat of such a major epidemic; it is very unlikely; worrying about it would be like worrying about another mega-volcanic eruption of Taupo or the earth being hit by a large asteroid. Further reasons for low concern is the miracle of modern developments in bio-science; vaccines are likely with a year. Even an epidemic that killed 99.9% would not be the end of humanity; in the past a severe epidemic meant an irreplaceable loss of knowledge (eg zero economists or computer programmers left alive) but so long as libraries exist skills can be relearned. In the past epidemics were spread by the very people delivering the message; now I can read about the dangers and how to avoid them from the comfort of my living room.
I agree with you that our govt should be pro-actively planning. For example setting up procedures giving priority to health workers and identifying other workers who are critical to the functioning of modern cities: such as electricity maintenance workers. A lifetime with computer systems taught me that if you have contingency plans in place they are never needed but if on the other hand….
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We do have a pandemic response plan, though I’ve not read it so unsure whether it considers responses beyond the health system ones;
https://www.health.govt.nz/your-health/healthy-living/emergency-management/pandemic-planning-and-response
I suspect the effects of a global financial crisis is likely to hit us sooner than a global pandemic crisis. Most important thing NZ has to do now is decide whose side it is on;
https://www.globalfirepower.com/countries-listing.asp
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Indeed. Just flicking thru some of the economic bits, there is basically nothing there – about as high level as our initial efforts back in 2005/06
https://www.health.govt.nz/publication/new-zealand-influenza-pandemic-plan-framework-action
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Two way trade between China and NZ is $29 billion, of which exports to China is only $16 billion which makes a marginal difference between imports and exports of $3 billion. China has a mouse like leverage to make any threats. Its like a big loud yawn everytime somehow shows dramatic concern over how exposed NZ are to China.
Maori businesses on the other hand are highly exposed to China having most of their $60 billion in assets invested in Primary production and fisheries. Any leverage China has will be through our Maori MP’s and significantly through our Maori Iwi 7 guaranteed seats.
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More of interest;
https://seekingalpha.com/article/4325211-ewj-japans-qe-house-of-cards-to-soon-break-equity-market
Everywhere one looks – it’s a house of cards.
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I probably wasn’t clear enough: I meant a severe pandemic of the sort described in the scenario, perhaps 1-2% CFR and 40-70% incidence. Entirely agree about some of those actual historical ones, including the Black Death in the 14th C.
Re missionaries, in west Africa they would often take their possessions out to the field in a coffin, such was the incidence of early death.
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I’m an atheist but I must admit to admiring some Christian missionaries. Has Britain produced any man the equal of James Chalmers? They could make a film of his life but nobody would believe it. I doubt if today they could find anyone to travel to the remote and dangerous places he went alone and unarmed 140 years ago. My wife has similar stories about the history of Catholic missionaries in Papua.
My proposed clarification: ‘severe empidemic’ is one that has a dramatic economic effect as you describe and my ‘very severe epidemic’ would mean most houses in our cities empty.
From a history of Memphis: “”… culminating in the 1878 epidemic with more than 5,000 fatalities in the city. Some contemporary accounts said that commercial interests had prevented the rapid reporting of the outbreak of the epidemic, increasing the total number of deaths.”” and “” On August 23 the Board of Health finally declared a yellow fever epidemic in Memphis, and the city collapsed, hemorrhaging its population. In July of that year, the city boasted a population of 47,000. By September, 19,000 remained and 17,000 of them had yellow fever. The only people left in the city were the lower classes, such as German and Irish immigrant workers, and African Americans. None had the means to flee the city, as did the middle and upper class whites of Memphis, and thus they were subjected to a city of death.””
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If…. we just don’t know what we don’t know… and idle speculation help no one… Based on the data tracking this – for example the page being run by John Hopkins University in the US the death rate is around 2.5% and the recovery rate is rising strongly…
Its certainly a brake on the world economy because of the supply chain effects that link back to China… hard to do business when no one is going to the office/factory… It may be like a severe recession… short, nasty shock to the system with a rapid return to the growth path…
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Who knows how long this coronavirus will take to run its course or what the real infection and mortality rates will prove to be? I certainly hope our Ministers and bureaucracy are planning for all contingencies but I doubt it – their response so far has been chillingly feckless. The long term lesson however is clear; it is both foolish and dangerous to allow your exports and supply-chains to become so dependent on one country’s markets and manufacturing capacity.
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I agree. Not a good idea to have your major export industries dependent on one country to take the bulk of that production. We’ve seen this in the past with Australia and it’s mining industry. China is such a vast population that it can be an easy and lazy strategy to shovel all the product there rather than put the time money and work into diversifying and developing new markets. Now is a good time to have a business and national strategy of less dependence on China in the future.
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A couple of comments from a reader, who inadvertently responded to another post:
Andrew Montgomery
February 19, 2020 at 1:44 pm Edit
Medical servces in 1918 were non existent – you got sick you died – so no problem
Today – in a bad influenza season in the USA 60,000 die in a year.
That is 0.02% mortality rate
All of those who die have a prodrome of hospitalisation and very expensive care
If Corona inflcts a mortality rate of 0.2% – it would be sufficient to at best cause massive disruption to normal service provision – and at worst completely overwhelm health systems on a global scale
Currently the rate of assympotmatic infection is quite likely underestimated by a factor of 5 to 10 -which is why I chose 0.2%. mortality.
Regards
Andrew Montgomery GP.
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Michael Reddell
February 19, 2020 at 1:54 pm Edit
Thanks (altho I think you’ve replied to the wrong post).
You may well be right – and in your scenario the econ consequences (as well as the human ones) would be less severe – but then at the moment no one has much basis for believing any of the PRC data (deaths or case, symptomatic or otherwise).
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Andrew Montgomery
February 19, 2020 at 2:07 pm Edit
Sorry about that – if it could be transferred to the right place that would be more helpful of course
China is certainly unreliable – but is clearly terrified as manifest by their lockdowns.
The aggregate of epidemiologocal opinon is pessiimistic and the general thinking is that it will act like a flu virus pandemic.
The race is on to porduce a effective antiviralad that may wel happen – but it would not necesarrily impact suffciently upon hospitalisation and service displacement.
Once a vaccine is available -ie ina year or whatever -no problem
It is what happens between now and then that matters
The UK data is reassuriung while Singapore and Japan are not.
It will only be knowable over the next few weeks
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In case you hadn’t seen it;
https://www.rnz.co.nz/news/political/409902/jacinda-ardern-tries-to-soothe-virus-rift-with-china
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One thing we can be sure of is this will not be the last pandemic to sweep the world. And mass world tourism and air travel is quite likely to be destroyed for ever, if a really devastating pandemic breaks out. (Not to mention the appeal of cruise ships). Very quickly countries would revert to siege mentality and arms length contact with foreigners, their populations will demand it. Those countries dependent on tourism for foreign exchange would suffer more.
However recent events hopefully may mean the end of the exotic wildlife food markets in China, but they also exist in other parts of Asia and Africa. Even the famous pet market in Bangkok (Chatuchak) is possibly a virus breeding ground.
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Exotic creatures to us but may be part of their staple diet in some communities. Anyway it is not the eating, it is the close proximity to animals that allow viruses to cross over from animal to human.
SARS was a bird flu.
Bubonic Black Plague were rat fleas
1918 Spanish Flu was also a bird flu
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[…] a reminder here of my post last week with some speculative thoughts on the potential economic ramifications if things go really […]
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