On Monday, February 24, stock indices tumbled, spooked by reports that the coronavirus outbreak that emerged in China is spreading to countries including Italy, Iran and South Korea. A day later, trading in stocks across world markets remained choppy, reflecting hope that the economic fallout might be manageable — just as damage from the SARS epidemic was some two decades ago — but also fear that the economic impact could be significant and linger longer.
The markets’ movements mirror the uncertainty that prevails and persists not just in the U.S. but all over the world. Several weeks into the coronavirus outbreak that has brought the world’s second largest economy to its knees, some of the most basic aspects of the virus remain unknown. It’s not yet clear how widely beyond China COVID-19 will spread; this week, numbers of infected individuals have surged outside China. Still, exactly how it is transmitted, how easily, and how lethal it might be are aspects of this coronavirus that remain to be uncovered, according to University of Pennsylvania scientists.
As the human toll mounts, so does the economic damage. The business realm, of course, tends to shudder in the face of uncertainty, and right now, with reports on the seriousness of the coronavirus evolving each day if not each hour, the eyes of commerce are on epidemiology.
“This has many economic implications,” says Wharton management professor Mauro Guillen. “It has implications not just for China but for the entire world. The world depends on Chinese growth,” he says, citing both the country’s supply-chain role and consumer buying power. Still, he notes: “It is unclear how much impact in the end this is going to have.” But what is clear is that if politics and trade wars emerged as uncertainties in recent years, now a third leg in the stool holding up global confidence has suddenly gone wobbly. Some observers describe it as a classic “black swan” — a random event that is completely unpredictable. (An interview with Nassim Taleb, author of the book from which the expression is derived, can be heard here.)
“The long-term repercussion quite apart from whatever happens now is that we’ve got a source of risk we hadn’t thought about,” says Marshall W. Meyer, a Wharton management professor emeritus who consults in China. “My view is there is going to be a big adjustment of global trade patterns unless we are really lucky and [the virus] goes away very quickly. This became apparent after SARS, but SARS went away. And this may or may not go away. The real problem is people’s confidence, and in China how much political damage there will be and whether it will be contained. And there is no way to know.”
An Economic Earthquake
The damage has already been severe and has reached into a surprising array of sectors. As noted above, this week the markets responded negatively to the sharp uptick in cases outside of China, with the Dow Jones Industrial Average falling more than 1,000 points on Monday — its third-biggest one-day decline. (The selloff continued on Tuesday as the Dow fell another 879 points.) Major American orchestras have canceled tours in China. The cruise industry has seen the public-relations nightmare of more than 1,200 passengers quarantined aboard the Diamond Princess in Yokohama. With moneyed Chinese travelers forced to stay home, European tourism has taken a hit. “It’s seen as on par with an earthquake, a situation of emergency,” Mattia Morandi, spokesman for Italy’s ministry of culture and tourism, told The New York Times.
“It has implications not just for China but for the entire world. The world depends on Chinese growth.” –Mauro Guillen
Supply chains in the retail sector and others have been disrupted, factories in China have gone quiet, and passenger air travel has been curtailed. Apple recently announced that it now expects to miss its next quarterly revenue forecast as a result of shuttered factories and closed retail shops in China.
“This is going to be a slow-rolling, highly consequential event,” says Meyer. “I would say stock up on aspirin and Ibuprofen now, because the base ingredients come from China. Antibiotics come from China. Hong Kong wholly depends on China for its food supply, for its water.”
Economic disruption related to the coronavirus is expected to rob the world economy of growth for the first time since 2009, according to London-based research firm Capital Economics. “We assume the virus will be contained soon, and that lost output is made up in subsequent quarters, so that world GDP reaches the level it would have done had there been no outbreak by the middle of 2021,” the firm said in a statement.
What’s the potential outcome if the virus isn’t contained? According to a report by CNBC, Moody’s chief economist Mark Zandi noted on Tuesday that if the virus becomes a pandemic in Europe and the U.S., “that is the prescription for a global and U.S. recession.” Meanwhile, Federal Reserve chairman Jerome Powell suggested that there will “very likely be some effects on [the economy of] the United States” from the current outbreak, but, in recent testimony before the House Financial Services Committee, said it’s too early to say how much.
The philanthropic sector is beginning to divert resources to the crisis. The Bill & Melinda Gates Foundation has committed up to $100 million toward efforts to help strengthen detection, isolation and treatment efforts, to protect at-risk populations, and to develop vaccines, treatments and diagnostics. Hong Kong investor and philanthropist Li Ka Shing has donated $13 million to assist Wuhan, where the outbreak has been concentrated. Alibaba founder Jack Ma has committed $14.4 million, including $5.8 million to fund research into a vaccine.
‘Still Learning’
Of course, how much philanthropy eventually gets moved to combating COVID-19 depends on the eventual scale of the epidemic, and at any given point, no one has been able to say whether it has peaked.
But so far, this new coronavirus appears to be less lethal than SARS, says Susan R. Weiss, a faculty member in the department of microbiology at Penn’s Perelman School of Medicine. Its sudden, dramatic appearance may have been a function of some special circumstances.
“It started in Wuhan, a really dense city at the crossroads of many different means of transportation, and this happened at New Year’s, when a lot of people were traveling, so this was a perfect storm,” says Weiss. “SARS started in the Guangdong Province, which is much less dense and was more easily controlled.”
On the other hand, she says, SARS spiked up over about eight months, and then disappeared, and it’s not yet known whether COVID-19 will behave the same way. “We don’t know whether it will burn out, like SARS, or come back seasonally like the flu,” she said.
“This is going to be a slow-rolling, highly consequential event.” –Marshall W. Meyer
What is known at this point is the coronavirus’s nucleic acid sequence, “and that gives scientists a lot of information,” says Penn professor of medicine and infectious disease specialist Harvey Rubin. This helps in developing diagnostic tests and informs the approach to coming up with a vaccine. “What that doesn’t tell you is how transmissible it is. It doesn’t tell you whether the disease can be spread when it’s asymptomatic. We don’t yet know how transmissible it is person to person,” he says. “Right now, 99% of cases are still in China, but a small but important number are out of China, so the trajectory of this problem is still a time-dependent process…. We are still learning, and numbers are still coming in.”
Trade, Disease and the Moral High Ground
Experts have been vocal about what China has done wrong, debating whether the country recognized the epidemic soon enough and if the government’s ideological aversion to transparency delayed action and cost lives.
But what about the U.S. reaction? Is there something the U.S. can and should be doing beyond the $100 million that the U.S. government says it is prepared to spend to help China and other countries where the epidemic has spread?
“It’s already daunting for China to be coping with this, but we have a trade war going on, and it would actually be in the best interest of the U.S. to stop the trade war,” says Guillen. “It would create a lot of goodwill and would give us a good relationship as opposed to a confrontational one.”
In the meantime, he says: negotiate. “The U.S. can seek an agreement, but from a high moral ground — as in, ‘we know you are in trouble, let’s see what we can do about it.’ And if they don’t want to do what the Trump administration wants to do, the U.S. can re-impose tariffs.”
Getting to a trade solution now is also a recognition that our fates are intertwined. After the big 2011 tsunami in Japan, Guillen points out, “within weeks, many factories in the U.S. had to stop producing because they were getting components outsourced from Japan. This is a global economy. We have businesses and operations and connections with China, and if the second largest economy in the world is brought to a halt, it has the potential to disrupt things all over the world.”
Will the coronavirus crisis cause companies to look at China differently in the future?
“They are very likely to do so,” says Howard Kunreuther, co-director of Wharton’s Risk Management and Decision Processes Center and professor emeritus in the operations, information and decisions department. In research with Wharton professor Michael Useem for their recent book Mastering Catastrophic Risk: How Companies Cope with Disruption, the authors contacted chief risk officers and leading executives at more than 100 S&P 500 firms on the most adverse risks they had faced in recent years.
“If there is some message here, it’s that this is totally predictable.” –Harvey Rubin
“Every one of them said we are now paying much closer attention to the potential consequences of catastrophic risks than in previous years because they are happening more frequently: the 9/11 terrorist attacks, the 2008-2009 financial crisis, the 2011 Japan trifecta (earthquake, tsunami and nuclear accident) and more intense natural disasters. Firms are now engaging in enterprise risk management to reduce the likelihood and consequences of future adverse events that will affect their operations and are asking questions, such as how safe is it for us to operate here?”
Part of the rationale for these firms considering taking steps now is the high visibility of the coronavirus. “I don’t think they would be paying attention if it weren’t in the news every day,” says Kunreuther. Still, that doesn’t mean businesses should not consider taking action now given the potential for a pandemic. “The question is, what will they do? Will they undertake an assessment of the risk and ask what kind of risk-management strategies they can follow by examining the potential costs and benefits of undertaking these steps?”
“Many of us have been saying for years that it’s only a matter of time,” says Rubin, referring to the arrival of a serious epidemic or pandemic. “If we are lucky and this starts to abate and the mortality is relatively low, it’s unfortunate for the people who are sick and died, but next year or the year after something else could happen. The world needs to have not only medicine and healthcare infrastructure but also economic and information infrastructure. If there is some message here, it’s that this is totally predictable.”
A lot of attention gets paid to infectious disease outbreaks in the moment, and there is a lot of talk about vulnerabilities, preparedness and response.
“We talked about it after Zika, Ebola, during the measles outbreak, and then nobody talked about it anymore,” says Rubin. “For some reason this captures attention while it’s there, but then it goes away. People forget.”
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2 Comments So Far
Tomás Cushman
Well said! Coronavirus has been in all the headlines recently, and it’s indubitably a huge problem, but has the market overreacted? Is a 12% drop too much in the S&P 500? To be clear, that’s over $3 trillion in American equity! It could be helpful to look at past epidemics like SARS, Ebola, and Zika Virus. Ebola had a global economic drain of $53 billion while the Zika Virus resulted in a marked loss of $18 Billion according to Reuters and Johns Hopkins respectively. These figures come nowhere near $3 trillion, it is important to consider that Ebola affected mainly developing countries, and the Zika Virus was not highly contagious. What about SARS? SARS’ death rate was much higher than that of the Coronavirus, but it was also less contagious, so it would not be crazy to numerically compare SARS to the Coronavirus. According to a recent research paper by Elsevier’s Novel Coronavirus Information Center, SARS had a global economic drain of $30-100 billion, far less than $3 trillion. Furthermore, after a relief package was announced to the countries most affected by SARS, the cumulative number of reported cases flattened. That does not mean that the relief aid was the only factor that stopped the spread of SARS, but it was extremely significant. Recently, Hong Kong has announced a staggering $30 billion relief package for the coronavirus, and the global cumulative number of reported cases has already begun to slow down significantly (2500 reported cases a day to 500). And although the epidemic has reached the United States, it is only a matter of time before it dies down. So is the coronavirus a $3 trillion problem? Probably not. It is very possible that the epidemic is a catalyst for a not too distant recession, but isolating it as the reason for the recent stock market plunge, it is likely that analysts have generally overreacted. The world is not going to end, and pretty soon the S&P 500 could rebound. If the S&P 500 keeps plunging, however, it probably would not be because of the coronavirus.
Anumakonda Jagadeesh
Socio-economic impact of the 2019–20 coronavirus outbreak
The 2019–20 coronavirus outbreak has had further reaching consequences beyond the disease and efforts to quarantine it. There have been widespread reports of supply shortages of pharmaceuticals and manufactured goods due to factory disruption in China, with certain localities (such as Italyand Hong Kong) seeing panic buying and consequent shortages of food and other essential grocery items. The technology industry in particular has been warning about delays to shipments of electronic goods.
A number of provincial-level administrators of the Chinese Communist Party (CCP) were dismissed over their handling of the quarantine efforts in Central China, a sign of discontent with the political establishment’s response to the outbreak in those regions. It is likely in a move to protect Communist Party general secretary Xi Jinping from people’s anger over the coronavirus outbreak. Some commentators have suggested that outcry over the disease could be a rare protest against the CCP. Additionally, protests in the special administrative region of Hong Kong have strengthened due to fears of immigration from Mainland China. Taiwan has also voiced concern over being included in any travel ban involving the People’s Republic of China due to the “one-China policy” and its disputed political status. Further afield, the treasurer of Australia was unable to keep a pledge to maintain a fiscal surplus due to the effect of the coronavirus on the economy. A number of countries have been using the outbreak to show their support to China, such as when Prime Minister Hun Sen of Cambodia made a special visit to China with an aim to showcase Cambodia’s support to China in fighting the outbreak of the epidemic.
It is expected that Australia, Mainland China and Hong Kong have the most direct economic impact from the disruption, with Hong Kong already in recession after a long period of ongoing protests since 2019 and Australia widely expected to be in a recession with GDP contracting by 0.2% to 0.5% for 2020, but Morgan Stanley expects the economy of China to grow by between 5.6% (worst case scenario) to 5.9% for 2020. As Mainland China is a major economy and a manufacturing hub, the viral outbreak has been seen to pose a major destabilising threat to the global economy. Agathe Demarais of the Economist Intelligence Unit has forecast that markets will remain volatile until a clearer image emerges on potential outcomes. Some analysts have estimated that the economic fallout of the epidemic on global growth could surpass that of the SARS outbreak. Dr. Panos Kouvelis, director of “The Boeing Center” at Washington University in St. Louis, estimates a $300+ billion impact on world’s supply chain that could last up to two years. Organization of the Petroleum Exporting Countries reportedly “scrambled” after a steep decline in oil prices due to lower demand from China. Global stock markets fell on 24 February 2020 due to a significant rise in the number of COVID-19 cases outside Mainland China. By 28 February 2020, stock markets worldwide saw their largest single-week declines since the 2008 financial crisis. As the epidemic spreads, global conferences and events across technology, fashion, sports, etc, are being cancelled or postponed. While the monetary impact on the travel and trade industry is yet to be estimated, it is likely to be in the millions and increasing.
The epidemic coincided with the Chunyun, a major travel season associated with the Chinese New Year holiday. A number of events involving large crowds were cancelled by national and regional governments, including annual New Year festivals, with private companies also independently closing their shops and tourist attractions such as Hong Kong Disneyland and Shanghai Disneyland. Many Lunar New Year events and tourist attractions have been closed to prevent mass gatherings, including the Forbidden City in Beijing and traditional temple fairs. In 24 of China’s 31 provinces, municipalities and regions, authorities extended the New Year’s holiday to 10 February, instructing most workplaces not to re-open until that date. These regions represented 80% of the country’s GDP and 90% of exports. Hong Kong raised its infectious disease response level to the highest and declared an emergency, closing schools until March and cancelling its New Year celebrations.
The demand for personal protection equipment has risen 100-fold, according to WHO director-general Tedros Adhanom. This demand has lead to the increase in prices of up to twenty times the normal price and also induced delays on the supply of medical items for four to six months.
Stock market
On Monday, 24 February 2020, the Dow Jones Industrial Average and FTSE 100 dropped more than 3% as the coronavirus outbreak spread worsened substantially outside China over the weekend. This follows benchmark indices falling sharply in continental Europe after steep declines across Asia. The DAX, CAC 40 and IBEX 35 each fell by about 4% and the FTSE MIB fell over 5%. There was a large fall in the price of oil and a large increase in the price of gold, to a 7-year high. On 27 February, due to mounting worries about the coronavirus outbreak, various U.S. stock market indices including the NASDAQ-100, the S&P 500 Index, and the Dow Jones Industrial Average posted their sharpest falls since 2008, with the Dow falling 1,191 points, its largest one-day drop since the 2008 financial crisis. On 28 February 2020, stock markets worldwide reported their largest single-week declines since the 2008 financial crisis.
On 27 February, European Central Bank President Christine Lagarde indicated that while the European Central Bank was monitoring the outbreak, it was not yet causing a long-term impact on inflation and thus did not yet require a monetary policy response. On 28 February, outgoing Bank of England Governor Mark Carney stated that the British economy (which saw stagnation and car manufacturing declines in the 4th quarter of 2019) was being impacted by the outbreak because it relies heavily on tourism revenues and international manufacturing supply lines. On the same day, Federal Reserve Chair Jerome Powell stated that the outbreak was posing “evolving risks to economic activity” and that the Federal Reserve would use monetary policy to “act as appropriate to support the economy” but that “The fundamentals of the U.S. economy remain strong.” On 1 March, Bank of Japan Governor Haruhiko Kuroda stated that the Bank of Japan would “strive to stabilise markets and offer sufficient liquidity via market operations and asset purchases.” The Bank of Canada is expected to announce a regularly scheduled overnight rate decision on 4 March, and the Federal Reserve’s Open Market Committee is expected to announce a regularly scheduled federal funds rate decision following its 17–18 March meeting.
On 2 March, stock markets in Asia and Europe ended the previous week’s consecutive daily losses, while in the United States, the S&P 500 gained 3.9%, the NASDAQ Composite gained 3.7%, and the Dow Jones Industrial Average finished 1,126 points up (or 4.4%; its largest one-day gain since 2009).
East Asia
Mainland China
The economy of China was anticipated to generate billions in economic output. Morgan Stanley expected the economy of China to grow by between 5.6% (worst case scenario) to 5.9% for 2020. For reference, China generated USD 143 billion in February 2019, the month of Chinese New Year. The Chinese Ministry of Transport reported that trips on trains dropped 73% to 190 million trips from the previous year. Factories, retailers, and restaurant chains closed.
All 70,000 theatre screens in the country were shuttered, wiping out the entire box office. This is drastically in stark difference from the week of Chinese New Year in 2019 that generated $836 million.
Though cautioning that the economic impact would be short-term, NDRC Party Secretary Cong Liang views small and medium businesses encountering more difficulties in their operations. Human Resources and Social Security Assistant Minister You Jun specified that agricultural workers and college graduates would have difficulties.
Tourism in China has been hit hard by travel restrictions and fears of contagion, including a ban on both domestic and international tour groups. Many airlines have either cancelled or greatly reduced flights to China and several travel advisories now warn against travel to China. Many countries, including France, Japan, Australia, New Zealand, the United Kingdom and the United States, have evacuated their nationals from the Wuhan and Hubei provinces.
The majority of schools and universities have extended their annual holidays to mid-February. Overseas students enrolled at Chinese universities have been returning home over fears of being infected—the first cases to be reported by Nepal and Kerala, a southern state of India, were both of students who had returned home. Nearly 200 million students have been affected by the in-school closures, with the second semester after the Chunyun resuming on 17 February through online classes for students to follow from their homes instead. The Ministry of Education has introduced a 7000-server supported ” national Internet cloud classroom” to cater to the 50 million elementary and middle school student populations.
The Finance Ministry of China announced it would fully subsidise personal medical cost incurred by patients.
CNN reported that some people from Wuhan “have become outcasts in their own country, shunned by hotels, neighbors and – in some areas – placed under controversial quarantine measures.”
The sale of new cars in China has been affected due to the outbreak. There was a 92% reduction on the volume of cars sold during the first two weeks of February 2020.
On 24 February, China’s Standing Committee declared an “immediate and “comprehensive” ban on its US$74 billion wildlife trade industry, citing the “prominent problem of excessive consumption of wild animals, and the huge hidden dangers to public health and safety” that has been revealed by the outbreak. This permanently extends the temporary ban already in place since the end of January.
According to Carbon Brief, the coronavirus outbreak has resulted in China’s greenhouse gas emissions being reduced by 25%. In March 2020, satellite images from space provided by NASA revealed that pollution has dropped significantly, which has been attributed in part to the slowdown of economic activity as a result of the outbreak.
A notice at a supermarket in Beijing, which says each person can only buy one pack of surgical masks and one bottle of 84 disinfectant liquid a day.
As the epidemic accelerated, the mainland market saw a shortage of face masks due to the increased need from the public.[71] It was reported that Shanghai customers had to queue for nearly an hour to buy a pack of face masks which was sold out in another half an hour. Some stores are hoarding, driving up prices and other acts, so the market regulator said it will crack down on such acts. The shortage will not be relieved until late February when most workers return from the New Year vacation according to Lei Limin, an expert in the industry.
On 22 January 2020, Taobao, China’s largest e-commerce platform owned by Alibaba Group, said that all face masks on Taobao and Tmall would not be allowed to increase in price. Special subsidies would be provided to the retailers. Also, Alibaba Health’s “urgent drug delivery” service would not be closed during the Spring Festival. JD, another leading Chinese e-commerce platform, said, “We are actively working to ensure supply and price stability from sources, storage and distribution, platform control and so on” and “while fully ensuring price stability for JD’s own commodities, JD.com has also exercised strict control over the commodities on JD’s platform. Third-party vendors selling face masks are prohibited from raising prices. Once it is confirmed that the prices of third-party vendors have increased abnormally, JD will immediately remove the offending commodities from shelves and deal with the offending vendors accordingly.” Other major e-commerce platforms including Sunning.com and Pinduoduo also promised to keep the prices of health products stable.
Economy
China’s economic growth is expected to slow by up to 1.1 percentage in the first half of 2020 as economic activity is negatively affected by the new coronavirus outbreak, according to a Morgan Stanley study cited by Reuters. But on 1 February 2020, the People’s Bank of China said that the impact of the epidemic on China’s economy was temporary and that the fundamentals of China’s long-term positive and high-quality growth remained unchanged.
Due to the outbreak, the Shanghai Stock Exchange and the Shenzhen Stock Exchange announced that with the approval of the China Securities Regulatory Commission, the closing time for the Spring Festival will be extended to 2 February, and trading will resume on 3 February. Before that, on 23 January, the last trading day of a shares before the Spring Festival, all three major stock indexes opened lower, creating a drop of about 3%, and the Shanghai index fell below 3000. On 2 February, the first trading day after the holiday, the three major indexes even set a record low opening of about 8%. By the end of the day, the decline narrowed slightly to about 7%, the Shenzhen index fell below 10,000 points, a total of 3,177 stocks in the two markets fell.
The People’s Bank of China and the State Administration of Foreign Exchange have announced that the inter-bank RMB foreign exchange market, the foreign currency-to-market and the foreign currency market will extend their holiday closed until 2 February 2020. When the market opened on 3 February, the Renminbi was now depreciating against major foreign currencies. The central parity rate of the Renminbi against the US dollar opened at 6.9249, a drop of 373 basis points from the previous trading day. It fell below the 7.00 than an hour after the opening, and closed at 7.0257. (Wikipedia).
Dr.A.Jagadeesh Nellore(AP),India