Why the coronavirus is a threat to the global economy

As a kid, growing up in Manchester in the late 1950s, one of the first advertising jingles I ever heard was for “pop” (as we called it): “The Corona man is in your street, the Corona man you’re glad to meet…” And we were; fizzy drinks delivered to your door. (No wonder my generation has such rotten teeth.) But no such joy today. The world seems in the grip of a panic the like of which we haven’t seen since 9/11.

Now, I don’t want to rain on anyone’s parade, but it is really worth separating what I see as the irrational hysteria surrounding Covid19 from the potentially devastating economic damage that any kind of hysteria — real or otherwise — can do.

In 2018, the last year for which complete data is available, some 42 million Americans got sick with what they said was ‘flu’. Of these, 647,000 were hospitalised and 61,200 died.  So far this year, the Center for Disease Control says 13 million have caught the flu, 120,000 have been hospitalised and 6,600 have died. That’s a mortality rate of around 0.5 per cent, which (though it is higher than the 2018 figure) seems low to me.

Globally, the mortality rate for common influenza ranges from 1-20 per cent, though that upper figure seems to be based on the Spanish flu epidemic after the First World War, when the populations that were hit were exceptionally vulnerable, both because of poor nutrition and because demobilised troops spread the disease far and wide. The point is that common flu is a killer, with an average mortality rate of 1-2 per cent, hitting the elderly (particularly those in hospital) and the very young with disproportionate intensity. It is nasty; but, for most of us, it is just another stitch in life’s rich tapestry.

In comparison, Covid19 (which, though related to flu, is not technically an influenza strain) seems like pretty small beer. Through the beginning of this week, approximately 80,000 cases had been confirmed worldwide, with 2,618 deaths, almost all in China and neighbouring countries. That’s an assumed mortality rate of around three per cent, though it is likely to be a good deal lower than that since there are, inevitably, lots of unreported cases out there. Indeed, one UK academic study has put the actual mortality rate at only around 0.2 per cent.

Against the background of all this noise, I woke up this morning to the news that seven UK schools had been closed and that Chevron had sent 300 workers home from its Canary Wharf offices. Trivial — yes, but indicative of a kind of irrational panic. San Francisco has declared a state of emergency, despite no confirmed cases. Northern Italy seems to be in lockdown, Japan is in catastrophe mode, and South Korea has almost shut down.

True, the WHO is trying to keep things in perspective; it hasn’t (yet) declared a pandemic – though the political pressure for it to do so is intense. Equally, our own authorities are trying (commendably) to keep the lid on. But it is going to fail, despite the fact that, for all but the elderly (and perhaps the very young), Covid19 is neither more nor less of a threat than the myriad viruses that lurk every winter on the Northern Line.

Still, the economic impact is real and it could get a lot worse.

At the time of the SARS outbreak in 2002-2003, China accounted for about five per cent of global trade; now it is around 35 per cent. Even more important, 15 or 20 years ago, globalisation was really only getting warmed up. Now, there is virtually nothing that we buy that is not the product of complex global supply chains and, as global competition has heated up, those just-in-time supply chains have less and less slack in them.

We have already heard of the damage being done to airlines, hotel groups, the leisure industry more generally and logistics firms. But how long before you are not going to be able to buy an iPhone? Or a Samsung?  Or even a Jaguar? (Jaguar Land Rover reported that it is having to fly key components in via suitcases.) But it is not just Jaguar: all the major auto manufacturers are utterly dependent on Asian suppliers for the fiddly bits that we no longer make in Europe or the US.

A thought experiment: imagine that the global economy is like a crowded city, with cars, buses, trucks all trying to beat the lights – and all just one fender-bender away from total gridlock. This really may be the fender-bender, the “exogenous shock” that brings an unparalleled 11-year post-crisis expansion to a grinding halt. Sure, we recovered from SARS and MERS, and from the brief panic over Ebola. And central banks are certainly going to do what they can to make sure we get over this as well.

But, whatever Jay Powell, Mark Carney or Andrew Bailey may say, central banks have fewer weapons in their lockers this time around, with official interest rates at historic lows and quantitative easing having less and less impact. If things really do go pear-shaped this time — by which, I mean if consumer confidence really does collapse in the face of increasingly obvious supply disruption — it is going to be very hard indeed to avoid the kind of double-digit equity sell-off that devastates pension pots and that turns a slowdown into a full-fledged recession. Or worse.

It may not happen. President Trump’s over-the-top exhortations may well convince Americans (and they are the ones who matter) that the eight per cent drop in the Dow this week is yet another buying opportunity. And, of course, even this has to be kept in perspective: the Dow is still up four per cent year on year, the S&P500 is up 12 per cent and Nasdaq is still up a whopping 19 per cent.

But one thing we cannot count on is bipartisan support for talking the market back up. Indeed, a stockmarket collapse suits the Democrats to a tee and that means their friends in the mainstream media are going to big up the possibility of a collapse, regardless of the self-fulfilling nature of such warnings. It could be a very bumpy ride.