Implications Of The Coronavirus

March 21, 2020 by Joel Shertok

“From: Washington Post (March 19, 2020), The Atlantic (March 19, 2020), American Progress (3/6/2020), Morningstar (March 10, 2020)

1. THE CONCEPT OF A PANDEMIC

Pandemics are particularly dangerous because the general population does not have immunity to the disease. Interestingly, flu pandemics have decreased in severity with time, perhaps partly due to viral preference for diseases that are very transmissible but not lethal. Despite some similarities between seasonal and pandemic flu, there are also key differences. While seasonal flu is every year, pandemics can have multiple waves; Spanish flu came in three waves, and the 2009 swine flu had two waves.

Past pandemics have varied substantially in their lethality. For example, the 1957 Asian flu, considered a moderate pandemic, emerged in China in February 1957, reached the U.S. by June, and spread very rapidly in the fall in the U.S. and Europe, with the return to school seen as a significant driver for starting new community epidemics during that pandemic. The corresponding vaccine was developed too late and was not more than 60% effective. Most schools remained open and no travel restrictions or restrictions on social gatherings were undertaken; 25% of the U.S. population was infected. The 1968 Hong Kong flu was milder but more widespread (estimated at almost 40% of the U.S. population infected). The death rate may have been significantly lower than Asian flu because patients had some pre-existing immunity.

Coronavirus 101: A New Virus Related to SARS and MERS

On Jan. 7, a new coronavirus was identified as the cause of several cases of pneumonia in Wuhan, China. COVID-19 is the disease caused by SARS-CoV-2, one of a family of coronaviruses, and this particular strain was new to humans. Most coronaviruses spread between animals, although the common cold is often caused by a coronavirus. Like more serious coronaviruses SARS and MERS, SARS-CoV-2 is believed to have jumped to humans by first moving from one species known to carry these diseases to another species capable of transmitting the disease to humans. Like SARS-CoV and MERS, it is believed to be mostly spread through respiratory droplets, often from a patient’s cough.

A comparison with other outbreaks is one of the easiest ways to think about the potential spread of coronavirus, although every disease has slightly different characteristics that limit the accuracy of this analysis. The intersection of the fatality rate (the percentage of infected patients who succumb to the disease) and how contagious it is, if left unchecked, is a simple way to begin to outline the potential impact versus past pandemics. Epidemiologists measure how contagious a disease is using a reproduction number, termed R0, reflecting how many people an infected person can typically infect. Generally speaking, an R0 of greater than 1 is a threshold for a disease being able to expand into an epidemic, and a virus with an R0 above 1.9 is considered highly transmissible. In addition, a higher R0 means a sharper rise and fall of infection rates with a shorter duration of the outbreak. An R0 of 1.9 could imply an outbreak of months, with a two-month peak in infections, as seen with the 1957 and 1968 pandemics.

Diseases are generally the most dangerous if they are both very deadly and very contagious (high R0), but most diseases tend to be more one than the other, as the self-interest of viruses would favor evolution toward diseases that don’t kill their victims. For example, Ebola and rabies have very high fatality rates but are tougher to transmit. At the opposite end of the spectrum is the common cold, which is fairly easy to transmit but almost never fatal. Smallpox was one of the most destructive diseases, as it was both very contagious and very deadly. Also, the Spanish flu of 1918-19 caused more than 50 million deaths worldwide and killed nearly 3% of the population. However, the spread of a disease is more than these numbers--significant efforts to contain SARS have eradicated the disease, even though it is more easily transmissible than the standard flu (which is very widespread every year).

Even though death rates have been falling gradually for flu pandemics since the 1918 pandemic, coronavirus pandemics are a newer phenomenon and don’t have an established trend. Fatality rates are already being estimated, but this is very difficult to do accurately at the start of any pandemic.  One interesting observation on the lethality of the 1918 flu pandemic is that the high mortality rate of soldiers on the front lines of Western Europe exerted an evolution pressure on the flu virus. From the virus’ viewpoint, it makes no sense to preserve the life of your victim if the victim is going to die anyway from non-flu causes. Therefore, natural selection favored the emergence of flu mutation that both infected and killed rapidly.

2. WHAT IS TO BE DONE?

International Monetary Fund says the outbreak is the world’s “most pressing uncertainty.” The economic disruptions caused by the virus and the increased uncertainty are being reflected in lower valuations and increased volatility in the financial markets. While the exact effect of the coronavirus on the U.S. economy is unknown and unknowable, it is clear that it poses tremendous risks.

Policymakers should therefore immediately undertake a number of steps to address any economic fallout from the virus. The burden of meeting this challenge falls squarely on Congress and the Trump administration.  The guiding principles need to be:

·     Do no harm

·     Put more, not fewer, resources in public health efforts

·     Assure businesses that things will be fine if the virus hits their sector and remediate harm when necessary

·     Calm financial markets

·     Ease the risks for households and vulnerable populations

3. THE CHINA SYNDROME – 2020 VERSION

Economists have been using the SARS epidemic to put the coronavirus outbreak in context. The 2003 SARS epidemic is estimated to have shaved 0.5 percent to 1 percent off of China’s growth that year and cost the global economy about $40 billion (or 0.1 percent of global GDP).The coronavirus epidemic, which like SARS originated in China, differs in a few key ways.

China’s economy accounted for roughly 4 percent of the world’s GDP in 2003; it now commands 16.3 percent. If the coronavirus has a similar effect on China as SARS, the impact on global growth will be worse. Moreover, China’s growth is weaker than it was in 2003—after years of rapid economic development, China’s growth stands at 6 percent, the lowest it’s been since 1990. The dual effects of general economic deceleration and the U.S.-China trade war escalation has shaken its confidence. Even before the epidemic, China’s Purchasing Managers’ Index was already showing signs of contraction. The February reading slowed from 50 to 35.7, a level in line with that of November 2008 during the global financial crisis. The economic fallout from the coronavirus could rattle China’s economy further and dampen global growth.

Outside China, the outbreak has also affected global supply chains, as other governments have also taken immediate steps to slow the spread of the virus. The Harvard Business Review predicts that the peak of the impact will occur in late-March, “forcing thousands of companies to throttle down or temporarily shut assembly and manufacturing plants in the U.S. and Europe.” This again will disrupt global supply chains as well as demand for goods and services in the affected economies. These disruptions make it more difficult for companies in the U.S. and elsewhere to bring their goods to customers, and these companies will reduce exports from the U.S. to the rest of the world in the coming months.

Furthermore, households, companies, and governments alike are deeper in debt now than they were when SARS hit. For example, the U.S. nonfinancial corporate debt of large companies is currently around $10 trillion, up from around $4.8 trillion in 2003. Deutsche Bank released analysis showing the world’s major economies harboring the highest debt levels of the past 150 years, with World War II as an exception. They all still need to continue repaying that debt, even if jobs, customers, and tax revenues decline in a weakening economy. These fixed costs then will leave less money to spend on other things. Large amounts of debt often exacerbate an economic slowdown, especially if central banks can do little to ease that burden by cutting interest rates.

The world looks different from the last global virus outbreak in 2003. Global growth is already slow, and financial markets already have very low interest rates, which means that central banks in almost every major country have little ammunition with which to mitigate any potential economic fallout. This puts greater pressure on governments to use the power of their purse to counter the economic fallout from the coronavirus. While the fallout from the coronavirus will disrupt supply chains and global demand that could also affect the U.S. economy, the current situation also creates a lot of uncertainty over the longer term. Congress and the Trump administration can do a lot to counter the risks associated with the spread of the virus by engaging in fiscal policies (deficit spending) that will provide relief to affected populations and mitigate disruptions to U.S firms.

4. OUR FRAGILE SUPPLY CHAIN….CHEAP, BUT AT A PRICE

When Trump invoked the Defense Production Act, it was telling in two respects. First, it showed that the full force of the federal government will be brought to bear in the manufacturing of vital medical supplies. Second, it underlined what has already become clear: The way our modern supply chain is built is incredibly fragile.

We’ve built a global supply chain that runs on outsourcing and thin margins, and the coronavirus has exposed just how delicate it is.

We need to realize that there’s almost no industry sector—manufacturing and nonmanufacturing—that isn’t reliant on China in the United States.

Chinese materials and manufacturing are so pervasive that the average customer has no idea how many of their everyday products contain Chinese components, or how reliant on Chinese components most companies have become. If you don’t have a first-tier supplier who’s sourcing from China, then your supplier’s supplier is.

To understand why the modern supply chain is uniquely vulnerable to a threat like the coronavirus, you have to realize how quickly it has changed. China joined the World Trade Organization in 2001, and surpassed the U.S. as an industrial powerhouse in 2010. During the SARS epidemic of 2002 and 2003, China represented 4.31 percent of worldwide GDP – today, it’s 16 percent.

Western companies find it cheaper to manufacture goods in China, and elsewhere in Asia, than to do so closer to home. Car parts, technology, fashion, medical gear, and drug components are particularly vulnerable to disruptions in Asian markets. In 2012, after the Japanese tsunami, you couldn’t buy a red Toyota for months, because the one factory that made red pigment for Toyota was offline. Apple, Fiat Chrysler, and Hyundai have already warned investors of potential supply constraints due to the coronavirus pandemic.

In addition to offshoring, companies have emphasized “just in time” delivery, keeping only 15 to 30 days of products on hand. That has made global companies more profitable but has also “significantly increased supply-chain risk.”

The worst of the supply-chain disruptions would begin now. Fewer Chinese ships are on the water, and major ports around the world, such as Rotterdam and Le Havre, are already feeling the effects. Those 15 to 30 days of inventory (even if a company stocked up prior to the Chinese Lunar New Year holiday) are likely running low now. We are going to see a slowdown, disruption, less variety, less options to the customers.

As the COVID-19 pandemic ripples throughout the world economy, it’s possible that it may begin to change the way global supply chains work. Companies will come under pressure to diversify where they make their products, which will prove easier for some than for others. While the blood thinner heparin may still be made in China, it’s not as difficult to move the infrastructure for, say, the kind of fashion sold at H&M and Zara to other Asian countries. “You can still emphasize low labor costs by moving into Vietnam, Malaysia, and Cambodia,” he said. More electronic and car-part production could shift to factories in Mexico and Brazil.

5. THE NEW NORMAL

Taking the above into account (plus numerous other factors): how bad will this all be?

We have essentially made a collective decision to have ourselves a recession. We’ve shut down a significant portion of our economy, knowing that the result will be businesses going bankrupt, huge job losses and people losing their homes.

How bad it gets depends on decisions the federal government makes in coming days.

 JP Morgan forecast that the second quarter contraction would be a stunning 14 percent — worse than the depth of the Great Recession. If they’re right, this would translate to 7.5 million jobs lost by the summer. In the Great Recession, about 8 million jobs disappeared. Now some are predicting that the drop in payrolls for April alone could be as high as 5 million.

 Recessions are often set off by some kind of shock, but it’s usually preceded by a period of slowdown or uncertainty. Now we’ve gone from 60 to zero in days. You can now go to restaurants that are shuttered that were doing a booming business a few weeks ago.

 We’re already seeing a dramatic jump in unemployment claims, but current data almost certainly underestimate how bad the situation has already gotten. Those who have filed so far were people who were laid off last week, and also got their act together to file unemployment claims.

 If we know that we’re plunging off a cliff, the next question is how quickly we might begin to recover. Forecasts from Goldman Sachs, JPMorgan and Bank of America all assume the economy will bounce back in the third and fourth quarters of this year, but that might not be the case even if we get the virus under control: there are a lot of people losing their livelihoods.

 As part of the federal solution, we have to make it possible for businesses not to lay people off even if they aren’t working, through some combination of grants and low-interest loans, to get a “quick bounce-back” by keeping people connected to their employers.

 All these economists said we must do everything: Give support to state governments that are particularly vulnerable because they’re required by law to balance budgets; help employers not go out of business; shore up the safety net, including unemployment insurance, Medicaid and food stamps; and give support directly to people.

 During the Great Recession, we turned to austerity way too fast and lengthened the pain way longer than we should have. The danger is not in building up debt that eventually will have to be repaid, but in holding back because the numbers look too large. The risk is not in doing too much, but in doing too little. All this is pretty frightening — and it doesn’t even take into account how long it might take to control the coronavirus.

 Sources: Washington Post (March 19, 2020) , The Atlantic (March 19, 2020), American Progress (3/6/2020), Morningstar (March 10, 2020)