The first cases of coronavirus were recorded in China’s landlocked Hubei province, which has a population of about 59 million. Despite the Covid-19 virus and the respiratory disease it causes starting out as a local healthcare problem, it has become a global and an economic one because of the ways in which humans are profoundly interconnected through the world’s economy.
The first kind of interconnectedness is the one epidemiologists study: the human travel network. How a disease spreads depends on the number of physical encounters, and the probability of the virus jumping from carrier to new host. These encounters, caused mostly by global air and sea travel, are the ones policymakers have been trying to stop, albeit belatedly.
Two-thirds of planes belonging to Chinese airlines have been grounded, with share prices of UK airlines falling sharply. Similarly, hotel company shares have fallen, anticipating a decline in tourism and business travel. In today’s world, however, it is hard to bring the human travel network to a complete halt. The virus is now spreading faster outside China than inside it.
The second kind of interconnectedness that is transmitting economic pain out of China and other heavily affected countries is the global supply chain: the “goods network”. China now accounts for 9.6% of total UK imports; Italy, 4.1%; South Korea, just 0.8%. But because of their positions in the global supply chain, the absence of what these countries produce – from semiconductors, computer chips, plastics and phone network hardware to automotive components – will be felt more broadly.
Some businesses will be able to find alternative sources for products , assuming that the virus doesn’t spread further and faster. There are reports that alternatives are being sought in the machine tooling and automotive sectors. Otherwise, firms will be forced to rely on inventories, which are at historically low levels due to just-in-time production methods.
A third kind of interconnectedness that is transmitting the harm of the virus is the finance network. A widespread halt in economic activity could cause insolvencies and defaults on bank loans, putting the viability of banks in question, and spreading financial disruption even further. The financial crisis of 2008 started out as a moderate-sized and localised default on US sub-prime mortgages. Other countries became infected because banks elsewhere were exposed to those loans, to a highly uncertain degree initially, and other institutions were exposed to those banks, and so on.
The World Health Organization is recommending that people take simple precautions to reduce exposure to and transmission of the coronavirus, for which there is no specific cure or vaccine.
The UN agency advises people to:
- Frequently wash their hands with an alcohol-based hand rub or warm water and soap
- Cover their mouth and nose with a flexed elbow or tissue when sneezing or coughing
- Avoid close contact with anyone who has a fever or cough
- Seek early medical help if they have a fever, cough and difficulty breathing, and share their travel history with healthcare providers
- Advice about face masks varies. Wearing them while out and about may offer some protection against both spreading and catching the virus via coughs and sneezes, but it is not a cast-iron guarantee of protection
Many countries are now enforcing or recommending curfews or lockdowns. Check with your local authorities for up-to-date information about the situation in your area.
In the UK, NHS advice is that anyone with symptoms should stay at home for at least 7 days.
If you live with other people, they should stay at home for at least 14 days, to avoid spreading the infection outside the home.
Likewise in 2020 the difficulties of firms and banks close to affected areas in China, Korea and Italy infect others around the world through exposures to them. About 45% of holdings of shares held in the UK are foreign shares. And some of the 55% of domestic holdings will be in entities that themselves have financial exposure abroad. These direct and indirect exposures transmit the financial impact of the virus like a physical infection, only faster.
This is why we have seen warnings from companies that are very directly implicated – such as Apple, which manufactures iPhones in China – lead to globalised falls in the stock market. For example US stocks fell about 10% last week, the most in a single week since the financial crisis. The UK’s FTSE 100 fell 3.2% last Friday alone.
The other feature of the new global economy that is exporting harm out of the worst-affected areas are the new networks that propagate what John Maynard Keynes called “animal spirits”. Just as a false rumour can knock over an otherwise healthy bank as depositors rush to pull their money out, so panic by consumers and firms worrying about shortages of food or input supplies can make those worries self-fulfilling.
Billions of participants in social media provide a route for information and disinformation about the virus to spread in the same way that the actual virus spreads. We have seen ham-fisted attempts by leaders in China and the US try to exploit these information channels to dampen concern.
Today, central banks in Japan, the UK and the US vowed to help stabilise financial markets by promising to ease the economic impact, causing stock markets to rebound. However, following the financial crash, central banks have few tools at their disposal to soften economic shocks. Interest rates are close to their floor and central bank balance sheets are still swollen by post-crisis quantitative easing, and it is not clear whether further asset purchases would be effective or politically possible. The burden of responding to the macroeconomic effects of the virus is therefore going to have to fall mainly on governments, using tax and spending tools, and not on central banks. Politics impeded the response of fiscal policy to the 2008 crisis in the US, the euro area and the UK; we have to hope that politics does not prove to be such an obstacle now.
• Tony Yates is a former professor of economics at Birmingham University. He is an adviser at Resolution Foundation and Fathom Consulting
