The U.S., like nearly all of the rest of the world, is quite unprepared to deal with a vicious new disease, Coronavirus (COVID-19), or even to know how it should be regarded. The New York Times said on Tuesday that while “Wall Street is (finally) waking up to the damage the virus could cause, no one really knows quite what should be done.”
The Times focused on the uncertainties involved and reported “a strange divergence” among people in the trenches of global commerce—supply chain managers, travel industry experts, employers large and small who warned of substantial disruptions to businesses and the financial markets — and most economic forecasters who had been willing to downplay expectation of economic harm or loss of profits.
“Something had to give and this week, it did,” NYT said, “giving way to a more pessimistic view across major world markets.”
While “huge uncertainty” remains about how widely the virus will spread and how much damage it will do, at least the financial world “is realizing just how much is at stake” — and how different this may be from other recent hiccups in the global economy, notably last year’s trade war between the United States and China.
“It’s one thing if Wuhan is on lockdown, another if China is on lockdown; or Asia--and yet another if the whole world is affected,” said Patrick Chovanec, an adviser for Silvercrest Asset Management and an expert on the Chinese economy.
Since the end of the global financial crisis more than a decade ago, investors who have been the most alarmist about various risks have had a tendency to lose money. Global asset prices have been on a steady march upward despite the eurozone crisis, the end of the Federal Reserve’s quantitative easing, the trade war and every other problem that has occupied financial headlines.
So it is somewhat understandable if investors were quick to assume that coronavirus would follow a similar pattern — a temporary blip that reduced China’s growth for a quarter or two but had little lasting impact. “The portfolio managers apparently figured this is a flash-in-the-pan virus, that will end as soon as the winter does, and that even if that assumption isn’t right, that central bankers will step in and fix this mess, the Times said.
Markets accustomed to optimism may be all the more vulnerable if the virus becomes a global pandemic that causes meaningful pullback of commerce across major economies. The financial markets remain richly valued, even after Monday’s sell-off that included a 3.4% drop in the S&P, the steepest single-day retrenchment in two years. The U.S. stock market remained above its level of Feb. 7.
The trade war, in which the United States and China placed tariffs on specific imported goods, caused a significant slump in manufacturing last year. But the coronavirus is hurting service industries as well. If the authorities in major world economies start shutting down any facility where large numbers of people congregate — a list that includes factories, shopping malls and airports — the damage could prove broad and lasting.
When a hotel or airplane sits empty for weeks because people are afraid to travel, that is a loss that cannot be recovered once business returns.
That’s particularly relevant for the United States, where service industries account for the majority of economic activity. This means that even companies that made it through the trade wars unscathed might be exposed to lost revenue or business shutdowns because of the virus outbreak.
Moreover, while tariffs might put sand in the gears of global commerce, implications are different when gears stop entirely. Companies had many options for dealing with the trade war, whether sourcing goods from elsewhere or simply paying more for them.
The longer the shutdowns of Chinese production and the more widely other countries are forced to take similar measures the more the spread of the virus could affect the ability of global companies to do business.
Moreover, while the Fed and other central banks may well take action to try to insulate the world economy from the disease shocks, their tools are ill-suited to the task in many ways. The economic effects of coronavirus on the productive potential of affected nations from factors unrelated to those that more traditionally shape economic results like monetary policy or fiscal policy.
In addition, lower interest rates won’t make a sick person well or give public health authorities confidence that businesses can reopen. All they can do is lower borrowing costs and help encourage businesses and consumers to spend and push financial market prices higher.
“We would rather have a vaccine than a rate cut and fully recognize that monetary policy is not optimized for addressing this type of shock,” said Krishna Guha with Evercore ISI, in a research note. “But it does not follow from this that the appropriate path of policy under the shock is unchanged.”
Neither economists nor portfolio managers make particularly good epidemiologists. But what has become clearer in the last few days is that it is the science of epidemics — and the policy choices that nations make to try to address them — that will shape the economy for the near future, and maybe quite some time to come.
So, we will see. Amid growing concerns regarding economic impacts, there is new talk of additional technologies and perhaps potential to build a vaccine fairly quickly. However, the new disease threat is at least being taken seriously and its implications should continue to be watched closely as they develop, Washington Insider believes.
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