The impact of coronavirus on the global economy is growing and spreading daily. What started as a medical emergency in the Chinese city of Wuhan has led to planes being grounded, cruise ships being quarantined, theme parks being shut and car plants being mothballed.
TV footage of deserted streets and empty shops tell their own story: China’s economy, which was already slowing, is going to suffer a major hit as the authorities seek to stop the virus from spreading.
But the effects have now rippled out well beyond the world’s second biggest economy: to Hyundai announcing a suspension of production in South Korea because of a shortage of parts; to a dramatic drop in tourist revenue in Thailand; to casinos being closed in Macau.
Financial markets remain confident the crisis will soon blow over. After heavy selling last week, share prices have been rebounding because investors think coronavirus is containable. There was a flurry of excitement at unconfirmed reports that a Chinese university had discovered an effective treatment.
But as Neil Shearing, the chief economist at the consultancy Capital Economics, notes, the impact will be determined by how the virus spreads and evolves – and if the epidemiologists are unsure, it is reasonable to assume that economists do not know either.
The breezy confidence of the markets is based on three assumptions, all of them questionable. First, that the authorities in China – who are regularly accused by financial market analysts of massaging the country’s growth figures – are telling the truth about the scale of the problem.
Second, that coronavirus is going to be a rerun of the Sars (severe acute respiratory syndrome) outbreak in 2002-03, when there was a brief downturn lasting one quarter before the Chinese economy snapped back.
But China accounted for only 4% of global output in 2003 and is now four times as big. It matters both as a source of global demand – for German machine tools and Land Rovers – and as the hub of global supply chains responsible for everything from TV sets to mobile phones. Even if coronavirus is contained as quickly as Sars, there will be a more marked impact.
Third, if coronavirus does prove to be more serious than Sars, central banks will do whatever it takes to prevent a global stock market meltdown. Yet of all the world’s major central banks, only the US Federal Reserve has much scope for cutting the cost of borrowing. Interest rates elsewhere – in the eurozone, Japan, and the UK – are at, or close to, rock bottom.
For the past decade, financial markets have been conditioned to pile in every time share prices fall for fear that they are missing out on a buying opportunity. Sooner or later, that optimistic view of the world is going to be proved wrong.
Mohamed El-Erian, the chief economic adviser to the insurance company Allianz, thinks that moment may have arrived. He says the economic damage caused by coronavirus will play out over time.
The crisis, he says, began with a sudden economic shock to Wuhan and the surrounding area. Factories were closed and travel restrictions imposed. In the next phase, plants were closed in the rest of China and more extensive restrictions of the movement of people came into force, first national and then cross-border.
This is happening at a time when the global economy looks particularly vulnerable. Growth has slowed but a prolonged period of low interest rates has encouraged investors to take ever bigger risks, much as they did in the run-up to the financial crisis of 2007-08, when the feeling was that the good times would go on for ever.
So could coronavirus prove to be the equivalent of the collapse of the US sub-prime mortgage market: a black swan? Those of a cautious bent, like El-Erian, think it could.
A black swan event has a number of characteristics. It has to come as a complete surprise. It has to have profound consequences. And, once the dust has settled, people who never saw the crisis coming say that it was glaringly obvious that there was trouble ahead.
The coronavirus outbreak would seem to tick all three boxes.
