The coronavirus is not only causing panic, hoarding, and generalised anxiety. It is also causing economic disruptions. Plunging stock markets suggest that many investors are pricing in a sharp recession. But could things get worse than that? Could the coronavirus cause an economic depression?
To be clear, at this point, the most likely outcome is that we will have a sharp, short recession. However, while that is the most likely outcome, there are worse possibilities.
Here’s why some people think that this could be more than a general downturn.
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The coronavirus appears to be relatively contagious. While it is nowhere near as deadly as other pathogens like SARS, MERS, or Ebola, it does appear to cause severe illness in around 20% of those who develop the associated illness, COVID-19. Most of those who become seriously ill have to go to the hospital, and some of them need critical care – ICU beds, in other words.
Unfortunately, there are only so many hospital and ICU beds to go around. If those beds fill up, very sick people will not be able to get the care they need. Plus, people with other medical problems, like heart attacks or traumatic injuries, won’t be able to get the care they need.
The result, in a full-on outbreak, would be many unnecessary deaths. While the hardest-hit would be elderly people, COVID-19 is also serious for many people between 20 and 65 – data from the US shows that 40% of people hospitalised with coronavirus were between 20 and 54. Younger people will also be affected by the lack of hospital capacity in the event of an overwhelmed health system.
No one wants this to happen. So, to prevent it, many governments, including the South African government, are taking aggressive actions to slow the spread of the coronavirus. Measures include school closures, travel bans, lockdowns, and social distancing rules.
These measures may stop the disease. But they will also stop the economy. Indeed, in some places, full lockdowns have almost wiped out economic activity. In China, the lockdown of a portion of the country earlier this year lead to a 20% fall in retail sales and a 13.5% fall in industrial output. Economists estimate that the hit to the US economy from shutdowns may be of a similar magnitude. Italy – the world’s eighth-largest economy – has shut down entirely.
This type of economic shutdown is more or less unprecedented. It is happening very fast. Just two weeks ago, most of Europe was going about its normal business. Today, everything is cancelled. Two weeks ago, US president Donald Trump was insisting there was no danger from the coronavirus. Today, the S&P 500 is down nearly 30% and the US government is proposing a trillion-dollar stimulus package.
The economic hit has happened fast, and it is brutal. Jobs are evaporating as bars, restaurants, airlines, travel companies, cinemas, theatres, and department stores close their doors. With everyone hunkered down at home, people are driving less, so even record-low oil prices are not boosting the economy. Fear is everywhere – fear of losing jobs, fear of businesses closing, fear of not making the rent.
In this environment, the risk of a short-term downturn becoming something more serious is elevated. Once fear grabs hold of households, people start to hoard cash and it can be very, very difficult to get the economic wheel turning again.
Many governments are recognising this. They know that people have been retrenched or furloughed and that salaries are not being paid. They know that small businesses – which have less capital to tide them over – are closing down. In response, these governments are moving quickly to put emergency measures in place – things like emergency income support for affected households, emergency loans for small businesses, and emergency sick pay for the quarantined.
These measures are designed to smooth things over for the short-term. The explicit goal is to tide people and businesses over while the economy is in lockdown so that they can hit the ground running when things get back to normal.
Here’s the problem: We do not know when, and if, things will get back to normal.
Lockdown measures may have to stay in place far longer than people have envisioned. The fact that Europe and the US are being hit pretty much simultaneously means that the global impact of this “temporary” disruption could be much bigger than expected. Financial markets are showing signs of crisis – especially corporate debt markets – so this temporary economic shock could mutate into a full-blown credit crisis, causing much more lasting economic damage (especially as we still haven’t properly recovered from the last credit crisis in 2007/8).
The oil price shock could make everything worse by hurting economies like Saudi Arabia and Russia, which aren’t yet in lockdown. Finally, much of the lost revenue from this quarter is lost forever. While manufacturers can generally make up lost volumes with later, intensive production bursts, service businesses don’t work that way. You are unlikely to go out and drink 20 drinks four days a week in June to make up for missing out in March. Flights that left half-full will never recoup those losses. Thus, even if loans get businesses through the crunch, they will struggle to make up lost ground and some job losses will be permanent. Confidence will take time to rebuild, and consumers may remain shy of public spaces even after lockdown lifts.
In other words, there are a huge number of unknowns in play. We are doing something that has never been done before – we are voluntarily shutting down our lives to fight a virus. We don’t know what will happen. We don’t know how significant or lasting the damage will be. It may be minor – by July, we could be looking back at this and laughing. Or it could be worse than anything in living memory.
It is this profound uncertainty that you see reflected in financial markets. People simply don’t know what is going to happen and they are reacting out of a rational fear of the unknown. They could be wrong. This could easily be a brief, passing storm that is eased by government spending and has no lasting effect. Or it could profoundly reshape our economies and how we live. There are no crystal balls. All we can do is wait and hope.
