Is the New Coronavirus the Black Swan of 2020?

The economic impact of the fast-spreading virus may be worldwide
January 28, 2020 Updated: January 30, 2020
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Commentary

Is it too early to start thinking about how the global outbreak of the new coronavirus will affect the world’s economy? With the Dow Jones Industrial Average falling 454 points—a 1.6 percent decline—on Jan. 27, it’s reasonable to think that more disruptions could be on the way.

And though we don’t know yet the scale or duration of this deadly disease, if the 2003 severe acute respiratory syndrome (SARS) outbreak is any indication, then economic stresses are unavoidable.

The question is, how bad could it get?

Coronavirus Is Salt in China’s Wounded Economy

As China enforces the biggest quarantine in history, with 17 cities at a standstill, such a massive event can’t help but influence economic metrics. Mandating millions of people to stay home as a way to prevent further spread of the virus means that people aren’t working or out shopping. That’s adding salt to an already wounded Chinese economy.

Furthermore, although millions of people have taken the week off for the Chinese New Year celebrations, Chinese authorities are extending the time of absence to Feb. 9. Schools will remain closed for even longer, with sporting and religious events canceled. Nobody in those cities is going anywhere.

Of course, the virus’ two-week incubation period, when it is also contagious, makes a delayed return to work a sensible precaution. That’s a big factor, too, because the SARS virus was not contagious during its incubation period. At the very least, China should expect a contraction in its consumer spending from these actions.

The economic damage could be as much as a 1 percent drop in China’s 2020 GDP, according to Economist Business Intelligence Unit figures. But that estimate is based on the effect that the SARS virus outbreak had on a much smaller Chinese economy. China’s economy is much larger today, but then, the new coronavirus is bigger, too.

Will the New Coronavirus Be Worse Than SARS?

The current situation may, in fact, have the potential to become much worse than the SARS episode. For one, its virulence is accelerating as it mutates to become more adaptable to human beings. No one yet knows how much that will raise its level of contagion or danger to human life.

Secondly, as noted above, it’s contagious during its two-week incubation period. And, according to Yi Guan, China’s most celebrated virologist, they have already missed the golden window of containment for the new coronavirus. Containing it will come at a much higher cost and could take much longer.

Third, China is working around the clock to add or free up 100,000 hospital beds in Hubei Province—which is ground zero for the outbreak—to address the anticipated need.

None of these factors bode well for a quick resolution. Indeed, some are already saying that the spread of the new coronavirus may lead to a worldwide recession.

Big Questions Need to Be Answered

That could be the case, although it seems premature to be calling it a certainty. One of the reasons we don’t know is that China hasn’t been forthcoming in providing critical information. For example, they have yet to divulge the actual number of infected people and how many have actually died from the new virus.

There are other big questions that need answers. The Chinese Communist Party (CCP) has yet to provide the world with a credible source of the virus. Was it from the close proximity of multiple species of wild animals in the large, open market in Wuhan, or the Level 4 bio-weapons lab 20 miles away?

Regional Economies Affected by Negative News

At the same time, other regional economies dependent on China will likely feel the economic pain from the outbreak. Some are already feeling it.

Unfortunately, the positive news of China’s phase one trade agreement with the United States is already forgotten, overshadowed by this evolving health crisis. If the crisis continues to expand, the phase one deal may be over before it even begins.

The positive impact of the relocation of supply chains out of China into neighboring countries has also been undercut by the emergence of the coronavirus contagion. With the confirmation of cases in Taiwan, Thailand, Japan, and South Korea, travel and trade levels are shrinking a bit in the region.

A Black Swan Event?

At the outset, I mentioned the 1.6 percent drop in the Dow as a potential precursor of things to come. That could well be. The outbreak may just be the last and unforeseen brick that breaks the back—or just the confidence—of the global economy.

We’re not there yet, but perhaps on the way. We’re seeing global capital markets spooked, travel restrictions being put in place, and information being withheld, especially from China. Uncertainty grows in such a climate. And as the virus continues to gain strength, cases appear in more countries, and nations evacuate their people from infected areas, today’s trading partners may not be partners tomorrow.

That isn’t a positive global economic climate in which to promote growth. In such instances, fear—well-founded or not—overrides greed, and that means a slowing global economy could be just ahead. No one saw this coming, and at this stage, no one sees it ending, either.

For China, if not the rest of the world, the Year of the Rat may well turn out to be the Year of the Black Swan.

James Gorrie is a writer and speaker based in Southern California. He is the author of “The China Crisis.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.