This week saw China announce a drop in new cases and fatalities from coronavirus, raising hopes that containment of the virus may be working. Unfortunately, those hopes were almost immediately dashed by the announcement that new diagnosis methods had yielded another 15,000 cases.
It’s a worrying development, but not necessarily for the reasons you think. Thus far, the majority of cases remain contained to China, while the death toll is lower than the average flu season. But the broader impacts are still an unknown. The virus itself may not easily cross borders, but our reactions to it will, from flight cancellations and quarantines to factory closures.
And even if the outbreak is successfully contained to China, its impact on world markets is just starting to be felt. Indeed, the biggest threat to the global economy in 2020 may not come from Donald Trump or his trade wars, but instead from the coronavirus.
DON’T PANIC (ABOUT PANDEMICS)
Just like SARS in 2002, Swine Flu in 2009, or Ebola in 2014, COVID-19 (the “coronavirus”) appeared unexpectedly, potentially the result of a jump from animals to humans. In this case, the center of the outbreak was found in the city of Wuhan, China. Though the Chinese government’s initial inclination appears to have been to cover it up, a combination of whistleblowers and the wide spread of the disease eventually led Beijing to notify the World Health Organization.
As of mid-February, COVID-19 has sickened over 60,000 people and killed at least 1,100. Cases have now been confirmed in at least fourteen countries, including several among those quarantined on US military bases after evacuation from China. That’s the bad news.
The Chinese economy is one of the world’s largest, and it has in many ways ground to a halt. Citizens were discouraged from traveling during the new year holiday, and businesses were shut down for several weeks.
But there’s good news too. For one thing, thus far the disease has been largely contained to China: almost all cases outside China’s borders occurred in people who had visited China or their family members. For another, many cases appear to be mild. It doesn’t seem to be infecting children. The mortality rate is still unknown, but thus far, the overall death toll is still only around 2-5% of the average annual deaths from seasonal flu.
Comparisons to recent epidemics are not particularly helpful for understanding the impact of the disease. SARS was more deadly, with a mortality rate of around 10%. It was not, however, as contagious as the coronavirus, reducing the number of overall cases. Indeed, the death toll for COVID-19 has now surpassed that of the SARS epidemic. Meanwhile, Ebola was far more terrifying, with a potential mortality rate as high as 90% among those infected. But it too was capable of being contained, with behavioral changes among medical workers particularly helpful in halting the spread of the disease.
Ultimately, many experts are cautiously optimistic about containment of COVID-19, suggesting that new cases of the disease could peak as soon as the next few weeks. The bottom line – as with all epidemics – is that it’s too early to know what to expect. But the early indications don’t suggest that we should panic.
MISSING LINKS IN THE CHAIN
So far, so good.
The economic impact, in contrast, might be a cause to worry. Stock markets are increasingly volatile. Just this week, the stock market hit an all-time high (as traders hoped that the virus had peaked), followed by a rapid retreat as the Chinese government announced that previously unreported group of 15,000 cases.
The Chinese economy is one of the world’s largest, and it has in many ways ground to a halt. Citizens were discouraged from traveling during the new year holiday, and businesses were shut down for several weeks. Many remain shuttered. Tourism and business travel to China has dropped dramatically; hotel operators report an 85% drop in occupancy across the country compared to usual at this time of year. Fourteen countries have now banned or restricted flights from mainland China, and major cruise lines have suspended port calls.
In an era of globalization and economic integration, this means knock-on effects for world markets. Oil prices are down, with canceled flights and shuttered factories presenting oil producers with what some have described as the biggest demand shock in the oil market since the 2008 financial crisis. While OPEC is trying to be non-alarmist, a number of its member states are already engaged in voluntary production cuts to maintain the price of oil.
Global supply chains are also increasingly disrupted. Unlike during earlier epidemics, China today is central to modern supply chain manufacturing. It’s not just that your new iPhone may be a few months later than expected. China manufactures many parts used in factories elsewhere; unless their factories resume production, for example, car manufacturers in the United States may have to slow production lines as they run out of parts. Central banks and firms across the world are cutting their growth forecasts for the year in response.
There may be light at the end of the tunnel: for almost a week in mid-February, neither cases nor fatalities from the virus increased, suggesting that it might have reached its peak. The newly announced Chinese cases don’t necessarily undermine that conclusion.
But it’s also possible that the end of the tunnel is on fire: many have suggested that China’s data on the disease is untrustworthy. Cases could continue to rise, new clusters could develop in other countries, and the human and economic impacts might be far higher than originally anticipated.
Only one thing is clear: even in the best-case scenario, there will still be substantial economic impact around the world. It’s a reminder that even in an era of betting markets and 538, the things you can’t predict can end up being the most impactful.