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How corona could fulfill a long-held economic worry

by Thomas Schellen

At the time of writing (March 12) the number of known coronavirus infections had exceeded 126,000 and that the death toll was above 4,600 persons. Governments around the world have dedicated increasing medical, social, humanitarian, and financial resources toward bringing the threatening virus under control. At the same time, worries over the economic impact of the global pandemic have geared up to the point when the metaphor of a black swan (an outlier or rare financial crisis) has been employed by some financial experts. 

In terms of what (rather than a black swan) might more neutrally be dubbed a combination of a pandemic and potential global recession, companies around the world are showing impacts, from manufacturers in China and South Korea to the internet giants on the west coast of the US, and banks and financial firms in New York and London. The latest new and massive disruption to the world economy by March 12 was an announcement by US President Donald Trump that passenger travel from Europe would be severely restricted. With equity markets tumbling further as the second week of March got underway, it was impossible to estimate where the corona fall would reach its bottom. Publicly traded companies in developed markets saw the share prices drop in broad ranges, led downward by listed tourism and travel companies, such as airlines and cruise operators but also event management companies. Travel and tourism companies, listed or not, anywhere in the world concomitantly experienced weakened demand besides falling market valuations.  

Thus potentials for drastic contractions of business in countries heavily affected by the coronavirus outbreaks, such as China and South Korea, are emerging in tandem with a parallel contraction of global business. According to customs data released in China last month, exports fell by 17.2 percent and imports fell by 4 percent for the first two months in 2020 when compared with January and February of 2019. Expectations cited in media went as far as speculating on economic growth dropping to as low as 2 percent in the first quarter of 2020, compared with 6 percent growth in Q1 2019. The associated temporary stoppages of corporate activity have, moreover, been estimated to deny the global economy supplies of components of up to 50 billion dollars just in the month of February.  

Among major European economies, industrialists in Germany expect a continued recession in their sector. The manufacturers’ association Bund Deutscher Industrie, which already had to deal for the last six quarters with contracting production, said recently that it expects German industries to be stuck in recession throughout 2020, attributing this assessment not to political factors such as trade conflicts with the United States but to the global spread of the coronavirus and its economic implications. In the same vein, financial analysts in Italy have uttered expectations of a national recession in 2020. In Britain, expectations are for a stagnation in the first and contraction in the second quarter, while analysts in France also expect a recessionary development. On the bottom line of global economic expectations, economists in Germany, the UK, the US, Japan, and other G7 countries were speculating about a prolonged global recession engulfing OECD countries, with minor economic powers and small countries likely to be dragged along for a bad ride. 

Recession, recession everywhere 

The idea of a recession is deeply embedded in the mind of the average economist. This is to say, academic economists theorizing about cycles of expansion and contraction have been wedded to such concepts for at least a hundred years, since research of business cycles by scions of the profession—persons such as Nikolai Kondratieff, Wesley Mitchell, Arthur Burns, Simon Kuznets, and Joseph Schumpeter—elevated business cycle theories into international economic orthodoxy. Of course, cultural knowledge of multi-year economic cycles is much older. The central academic temple with air of quasi-religious authority on business cycles in the US, and with it expectations of recessions, is the National Bureau of Economic Research (NBER), which regularly surveys large numbers of economists what their expectations are in this regard.  

Last year, around the middle of 2019, NBER surveys showed a heightened predilection of economists to expect a recession—but basically a garden-variety one, nothing undue or severe—to hit the US at some point in 2020, most probably toward the year’s end. By reckoning of many economists later in 2019, however, the onset of a recession in 2020 seemed counter intuitive to the upbeat economic sentiment that was prevailing then—when the mood was once again shifting to increased optimism over the good performance of US stock markets and promising data on economic trends in production and employment.  

But in the first quarter of 2020, widespread expectations of a recession could not come as total emotional shock, especially taking into account not only data on the economy but considering external impacts such as a natural catastrophe, including an epidemic. Catastrophes or wars have long been understood to constitute potential triggers for a contraction and alteration of the business cycle, which in itself is not predictable in terms of its periodicity of shifting between expansions and contractions.  

(By the definition of the NBER a recession does not consist of two or more not consecutive quarters of linear GDP contraction but rather the period between the top of a business cycle and its trough, consisting of “a significant decline in economic activity spread across the economy” that lasts for more than a few months and is usually reflected by developments of real GDP, real income, employment, industrial production, and wholesale-retail sales.)

Still, it is noteworthy that global moods have been fluctuating from initial optimism over abilities of markets to rebound and continue their long, slow expansion of the past ten years (the beginning of the latest expansion period in the US economy according to NBER was in June 2009) to concerns over a prolonged global economic downturn, or recession. This recession may now be spreading from large producer countries in East Asia, due to skyrocketing fears of epidemics in previously complacent “advanced” societies at the top of the global wealth roster of high GDP, plus nervous financial markets in the US, Europe, and Asia. Although central banks are responding across developed economies, many observers concur that the banks’ capacities to soften the corona impact may be minor, due to generally challenging monetary environments that stand against intervention capacities of these banks.  

The virulent trigger 

The trigger for all this involves the coronavirus, which, although far from being lethal in direction of an extinction level event in the manner of a scientific horror movie, was discovered to be highly infectious and capable of spreading despite immense efforts of containment by quarantining entire provinces and metropolises. Surrounded by a combination of justified medical concerns and an “infodemic” (a term used by the World Health Organization) entailing unwarranted panics, uncontrollable online rumor mongering, and outpourings of criminal energy by some who seek to cash in on those rumors and fears, the virus outbreak’s impact on economic activity negates some recent signs of recovering national strengths—such as the improvements in the US economy, moderate growth in China and, albeit feeble, post-Brexit optimism in the UK.  

But even more concerning might be the impact on countries that in the current global GDP growth scenarios have already been marked by worrying signs of debt, anemic growth, unemployment, or recession. These run from weak economies in emerging markets like India, Brazil, and Turkey to political troubles in Iran, Iraq, and a number of developing and least developed countries under autocratic rule. Added to those are economic upheavals driven by social inequality and dissatisfaction in Chile and Hong Kong, next to deep troubles of economies in hotspots of inflation and debt like Argentina, Zimbabwe, Venezuela, and as of last year, Lebanon.  

Disease is a scourge of humanity, no question about it, and new infectious diseases carry with them a combination of new health risks and even greater fears. This was the unmistakable case with the coronavirus epidemics and its races around the world in the first quarter of 2020. Still, the question remains puzzling: Why or how would a virus with the number of confirmed infections in the tens of thousands versus a global population estimated at 7.8 billion and the mortality rate—except for the highly aged—residing in the single percentage digits produce recessions that affect numerous countries?  

Peculiar anatomy of the corona recession 

Economically speaking, there are at least five downturn factors to the development of the coronavirus recession, which will affect individual economies, regional economic blocks, and the global economy. In a headline capture, these factors relate to both the real economy, and there specifically also to globalization, as well as the financial markets. This is an unusual pairing of factors when one considers that most of the notorious recessions of the past century were related to either speculation or brought on by financial crises.  

In a more detailed tally, the multi-faceted factors that are fueling the corona recession, imply that it will be a potentially large and severe economic downturn—comparable in the words of some analysts to the Great Recession of 2008/9. These factors appear to entail the impact of the disease: preventive and cautionary measures on productive people and reduction of their full ability to work; supply chain disruptions; challenges to finances and debt situations of corporations, medium and small businesses; upheavals in equity markets; and some divergent developments in the sector with an overweight on sectors exposed to contractionary impulses versus sectors that are likely to realize gains from producing goods or services that see an increase in demand due to the virus.     

To be still more detailed, the first and most direct response to the comprehension of a new and highly infectious respiratory virus (other than momentary stonewalling by Chinese and later Iranian bureaucrats against full acknowledgement of the dangers related to the coronavirus) affected people and their workplaces. Swathes of people—in case of China, millions in Wuhan, a mega-metropolis of ten million people, plus in the surrounding Hubei province with a total population of nearly 50 more million—were sent into lock down quarantines. Demonstrating the rapidity of change in political responses and issuance of quarantines was the example of Italy, where a declaration of restrictions on northern provinces were expanded into nationwide measures. Responses and containment attempts furthermore multiplied in form of restrictions of cross-border travel into countries bordering heavily affected areas. In a side note, in the second week of March new infections in Hubei province were associated with travelers coming from Italy and Iran, hinting at the double possibility that the spread of the virus in the original hot zone of infections is slowing while infected persons now are found among those coming back from countries with subsequent infection waves.  

With workers asked to stay in home quarantines and movements of individuals being restricted, affected workplaces from factories in Wuhan and manufacturing plants in South Korea to a corporate office in Bavaria to Microsoft and Google sites in Seattle to churches, cultural attractions, universities, and bank offices in northern Italy had to implement closures that ranged from hours (for disinfection) to weeks of unscheduled vacations or home office work, with varying and not small concomitant results for employee productivity. Within weeks, these epidemically induced reductions in work and productivity spread around the world.      

While theoretically of limited economic impact under the temporal nature of such extreme measures, the reduction of work productivity extending into several weeks and perhaps even the major portion of a quarter has repercussions on output that reverberate for many additional weeks or even months by impacting production and sales of goods.    

A related and actually more severe economic impact to follow these local restrictions on manufacturing became visible in form of supply chain disruptions, as globally interdependent factories faced shortages of vital components in their productions even if they themselves were not affected in form of having to keep employees at home. Supply chain disruptions in the globalized economy generated ripple effects of inabilities to maintain production at desired levels across multiple countries due to non-deliveries of parts and components under supply chains that have grown to unprecedented length, complexity and—as is visible now—vulnerability. Thus supply chain disruptions caused by non-concurrent corona production outages and transportation problems have impacted globally industries from mobile phone producers to vehicle manufacturers to the point that some industry leaders in developed economies started advocating against hasty abandoning of cost-saving lengthy supply chains. 

The supply chain disruptions at multinational corporations as well as emergence of bottlenecks in industries that affected smaller enterprises translated quickly into financial problems ranging from payments of suppliers to servicing loans and credit lines by the affected companies, which in turn sent central banks and fiscal policy-makers into overdrive of initiating monetary and fiscal measures from reduction in the prime interest rates by the Federal Reserve and the Bank of Canada, and likewise steps by the Bank of England, to releasing of special credit facilities and billions of dollars in emergency measures and financial relief such as tax holidays for affected companies across countries, beginning with China where the People’s Bank of China initiated support for the local economy with a February 2 announcement that it would perform reverse repurchase operations worth 1.2 trillion yuan renminbi ($173 billion), alongside other financial relief operations mounted on local to national levels. Other countries to pass or  say they contemplate fiscal measures to date include the US (an $8.3 billion package was adopted in Congress, of which $3.1 billion were earmarked to the federal department of health and human services), Japan, the UK, Australia, the European Central Bank (the ECB is expected to proclaim stimulus measures on March 13) and various EU countries. In Hong Kong measures even extended to provision of cash payments to residents (known as Santa Claus or helicopter money) in hope of creating economic stimuli that would balance Hong Kong’s losses of economic activity due to demonstrations and now health-related reductions or absences of consumption.  

Correlated to the real economy’s sufferings were not only financing difficulties but also significant falls in equity markets. Seeing both economy-wide contractions in equity price or many companies and double-digit drops of stock market indices, billions could be lost in market capitalizations. After an upbeat mood early in 2020, markets dropped from February highs in the developed world and saw trillions of dollars wiped away from the global equation of wealth and corporate valuation in the first part of March. These losses in turn—under the concept of equity prices being key drivers of corporate investments into production, facilities and labor—spell trouble in form of negatively impacting willingness to invest by the listed companies, as well as signal possible reticence of households to consume.  

Finally, but also importantly, in specific sectors, recessionary impacts became visible immediately. Also reflected in their market capitalization and share prices, large airlines and tourism economy players from hotels to cruise companies saw dropping demand, facing the need to revise flight schedules and frequencies as well as reduce their capacities that they had allocated for expected levels of corporate and leisure travel in 2020 that will not be fulfilled. Hospitality enterprises from multinational holiday operators to SME-sized restaurants likewise were forced to revise their expectations that usually can count on office workers on lunch break or on Chinese tourists visiting the sites from Bali and Macau to Sydney, San Francisco, Paris, Rome, and London. Event organizers from large international trade exhibitions and conferences to cultural happenings and sports events had to cancel activities planned for the month of March and April and uncertainty has even risen over the staging of the multi-trillion dollar global sports spectacle of the 2020 Olympic Games, which are planned to be staged in Tokyo, Japan.       

One can expect some business to also derive increases in demand due to the coronavirus eruption and a few to capitalize on the fears that relate to the new health threat. In the latter category, shady communications outfits and providers of useless and fear-driven goods or services will reap criminal revenues. On the side of respectable services, some remote services—from home schooling and online tutoring to delivery services for daily consumables—will likely benefit in varying degrees (some of the added gains might be counterbalanced by higher cost of sick leaves) but this will not affect the economic equation enough to provide an equilibrium to the downturns of tourism, travel, conferencing, event, and hospitality services. This inability of balancing losses with new windfall gains must be expected, especially if the trade-offs between higher demand for some manufactured goods such as home entertainment, medical devices manufacturers, pharmaceutical companies, healthcare services, and preventive disinfectant and protective supplies providers are counter-weighted against weakened demand for cars, smartphones, restaurant supplies, airplanes, oil and other commodities, and reduced production capacities due to supply chain disruptions.  

Long-term effects and concerns 

Whatever can be expected to disrupt the global economy in upcoming quarters in form of the usual suspects—whether trade disputes, inequities brought on by neoliberal fixations, nationalism and populism nourished by social fears, parochial sentiment or even patriotic ambitions, economic fallout from the need to mitigate climate change, elections, selfish politics, and now the corona recession—the detrimental or difficult-to-mitigate impacts can hardly be estimated as far as key national economies and global interrelations at a point when even the impact of a corona recession in the first half of 2020 might be felt globally for an unforeseeable number of months.  

Furthermore, it seem far from inconceivable that the economic impact of the coronavirus outbreak, as well as any other recession scenario that may play out across multiple countries in the coming months, could be damaging to aspirations of achieving crucial social goals such as the sustainable development goals. Such follow-on problems from the fight against hunger and poverty to the long-term battle to improve control of diseases could affect the global poor more than—as of this writing—the coronavirus’s hard impact in terms of increased mortality rates in even the most severely affected societies.  

Many of history’s more notorious recessions—among the overall immeasurable number of sectoral, national, and transnational recessions since the enigmatic agrarian revolution of multi-millesimal age or even since the first industrial revolution some four centuries ago—were rooted in speculation (such as the famous tulip mania) or in finance and the overbuilding of asset values in “bubbles”—such as asset bubbles involved in the knickerbocker trust recession over a century ago, the 1997 recession in southeast Asia or the “subprime” real estate bubble in the United States between the early 2000s and the bursting of this bubble in 2007/9.  

As such, many noted recessions began in the financial world. By contrast, the corona recession of 2020 seems to involve factors in the real economy of production and repercussions to globalization and the complexification and extensions of supply chains thereunder alongside with financial elements involving buildup of corporate debt and equity asset bubbles on stock exchanges. This might then justify seeing the corona recession as an outlier to the usual recessions with an extreme impact that could transcend or be qualitatively different to recessions related to classical boom-bust swings or overheating asset prices.  

In longer-term outcomes and structural ramifications, a global corona recession starting in 2020 and extending for who knows how many quarters could lead companies and countries to rethink some supply chain aspects and result in shortening of these chains; it could take some of the heat out of tourism markets that had been stoked by China’s travel hunger that rose in parallel to the country’s wealth increases. It could exacerbate nationalist economic orientations and populist fear responses to alien cultures.  

However, taking trends and behavior patterns of people under more careful consideration, it is at the same time almost unimaginable that a corona recession, even if severe, could radically dial down globalization and supply chain interconnections, international lust for foreign travel and tourism, or clamp cultural exchanges shut. Shorter term ramifications for some of these activities—which correspond to human desires for cheaper and better goods, fun and discovery of the stranger—will be their minor adjustments, plus economic repercussions that will hit some companies, industries, and countries which are overextended and candidates for capitalism’s creative destruction.  

However, in the scouting of economic horizons and the possibility of further unexpected disruptions of economic life, additional factors may have to be considered. As human interaction with planetary environmental factors is both intensifying and lacking in responsiveness, the future is likely to experience new contributing factors to economic recession arising from natural catastrophes, including recurrent patterns of sudden epidemics and the impacts of climate change. The insurance industry—led by the European behemoths in the reinsurance business—already started worrying years ago about the accumulation of risks in coastal regions around the world that have been candidates for heavy impacts of feared rise in sea levels.  

Aggregation of risks in scenarios where increasing urbanization and continuing globalization of supply chains and integration or interdependence of financial markets and real economies are driving forces, appear logical in the continuation of global integration and concentration of economic and financial power, market dominances, and corporate wealth that is not mitigated by redistribution and diversification efforts.  

Moreover, just as intensifying business cycles of indeterminate duration but relentless economic interwoven-ness might be on the horizons, the cultural cycles of exposure to epidemics under conditions of ever increasing competition for overlapping living environments of animals and the human species are to be considered. Over the past few decades, hunting of—protected or not—wildlife as well as the exploitation of domesticated animals such as cattle and chicken have been associated with formation of viruses and outbreaks of new diseases. Such epidemics seem to recur in cultural biological cycles that correspond to expansions and contractions of concern over self-protection, regulatory controls, and enforcement of veterinary standards—which gives every reason to speculate that such epidemic cycles will also in future be observed and contribute to economic recessions.

The figures for coronavirus in this piece were accurate as of March 12. As it is an ongoing situation these numbers will rise.

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Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail

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