As new cases of the Coronavirus – COVID-19 – outside of China exceed those inside for the first time, we have to ask ourselves what next? Looking at the reactions of financial markets, governments and people around the world, fear seems to be settling in. The reaction of the financial markets has been growing in intensity in recent days as the virus spreads. But is it justified? Is fear itself one of the things we must also worry about?
Perhaps more importantly, what does the reaction to the virus tell us about the state of the world economy, its linkages, political and social issues and, perhaps, about the nature of human beings? The answer is a lot.
The broader economic and political context
First we need to consider the context. We are in a period of perceived heightened uncertainty and challenge compared to the recent past: from climate change to mass migration, from slow global economic growth, to fast technological change intermingled with globalisation.
Of course, it can be argued that it was ever thus, but these issues are all currently contributing to political and economic fissures within and between countries. Add COVID-19 to the mix and yet another layer of uncertainty, complexity and risk emerges.
That a developing country finds it harder to deal with disease than more prosperous economies is pretty apparent. But in both, the risks of it spreading are high and the consequences similar. That’s one reason why free vaccinations are usually best, as the more people get protection, the more immunity there is in the ‘herd’ or wider human population from the virus.
In short, you can fall ill and die from this virus, whether rich or poor, whether in a developed or developing economy. COVID-19 passes ethnic and national barriers with impunity. So, the world is in it together. Like so many of today’s challenges, the solution to COVID-19 calls for cooperation and coordination along global lines. In contrast, there appears to be a trend towards isolationism and deglobalisation.
What we can also see is that, generally speaking, authoritarian regimes deal with disease differently to free societies. The former usually hide it for as long as possible, so as not to look like they have lost control, but that can worsen its spread. However, once the decision to act is taken, then the response can be more aggressive.
The evidence from data so far
On the one hand, we have the data so far. Within China, cases of the virus seem to have peaked. But cases of the Coronavirus have spread to every continent except Antarctica. From being unknown a few months ago, it’s now gone global. Based on trends from SARS to Swine flu, it should peak next year in the world, and a vaccine should be available in late 2021 or early 2022.
Yes it is scary, and one death from it is one too many, but a sense of perspective is required.
The death rate outside the epicentre of the COVID-19 crisis in China is about 0.7%, although for the over 80s it is some 15%, so therefore a big risk to the elderly and those with underlying complications. In the epicentre of Hubei itself, it is around 1%.
In China, whilst 2,500 deaths in Hubei with a population of 50 million seems high, we need to remember that, in the UK over the last five years on average, deaths from seasonal flu are 17,000 in a country of 66 million.
During the Swine flu crisis, the worst-case scenario at the time from the UK’s health minister Liam Donaldson was of 65,000 deaths. In the event, it was 500. Again, too many but compared with flu a much smaller number. Of course, there is a vaccine for flu but not yet for COVID-19, so it is much scarier. However, the facts are that four out of five people who catch the virus do not need any medical help, and the symptoms are mild, so the experts say! Talk of 500,000 deaths in the UK, therefore, seems a bit of an exaggeration.
Economic impact on China and the world
The economic impact of the virus, however, is real – although so far at least only evident in China, it has now led financial markets to begin to ‘price’ in a ‘pandemic’.
The disease spread and the economic ripples illustrate the extent of travel and global linkages between people around the world. Trips from China hit 149.7 million in 2018, up from just 57.4 million 2010, as its economy expanded rapidly creating a middle class. In 2017, its tourism spend was $265bn, dwarfing the next biggest, the US, at $166bn. And the Chinese spend more than other tourists – according to UK data, nearly twice as much per visit compared with a US tourist. So, China’s slowdown (and restrictions on travel) matters to the world economy never mind the direct effects of COVID-19 in other economies as well.
The virus has led to factory closures in China, reductions in imports and exports and has hit global supply chains based in the country. To that list can be added the leisure, restaurant, and travel and tourism sectors.
Since it is the manufacturing capital of the world, it means that China’s growth is likely to slow, or possibly even contract in Q1. That would take the country’s growth rate to around 5% for 2020, the slowest in decades. With China second only to the US in economic terms, it would impact the world economy.
One estimate is that it could take up to $286bn off the level of annual global GDP, or around a ¼ of one per cent off growth. Since the IMF expects world economic growth to be 3% this year, the slowest increase since 2009, this would be a meaningful reduction.
If the economic impact of COVID-19 follows the pattern of earlier viruses, like SARs, China’s growth rate should be at its weakest in Q1 or Q2 of this year but recover to a faster rate of expansion than seen before the impact of the crisis in 2021. In other words, it will have a two-year impact on the world economy and China. To the extent it hits growth in the short term, it makes up for it in the medium to longer term.
Understanding the message
The logic of economics can sometimes be brutal. When markets dip, it is often a buying opportunity. When disasters occur, a vigorous recovery takes place once it is past. COVID-19’s effect may be no different. The rate of deaths is so far less than SARS and lower than some other diseases that are currently around, like Ebola.
There is a further worrying aspect of the crisis: lack of international coordination resulting from isolationism and deglobalisation will likely spread it. Elements of that seems to be happening at the moment. One risk is that COVID-19 could mutate into an even more lethal form if more people catch it and get reinfected.
But taking such views risks losing what this crisis tells us about the world, in all its nuances. So, I would instead summarise its totality from what the 17th century English poet, John Donne, wrote with such profound insight 400 years ago. His words more fully capture the wider profundity – or deeper lessons – of this event and the challenge of awareness the world faces in acting for the common good:
‘No man is an island entire of itself; every man is a piece of the continent, a part of the main; if a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as any manner of thy friends or of thine own were; any man’s death diminishes me, because I am involved in mankind. And therefore never send to know for whom the bell tolls; it tolls for thee.’