The Economic Cost of a Virus

Daltium Opinions

Since the Wuhan outbreak, and as of writing, 18 countries are now exposed and nearly 300 dead in China, albeit no fatalities outside of China as yet: The WHO has just issued a global emergency, stating that many Third World countries will be overwhelmed if it spreads globally. While it's been asserted that the Coronavirus is not as deadly or as fatal as SARS, its infectiousness is much easier and faster.

We are now seeing the seriousness of the situation putting a full stop on the lives of those in the affected areas. This could be the veritable Black Swan Event. The province of Hubei and the city of Wuhan are now on lockdown. China is becoming more isolated from the rest of the world daily – with a growing number of countries banning movement to and from mainland China.

Isolation is definitely a toll – and China is taking the brunt of this epidemic. More than a dozen Chinese cities are on lockdown, and millions of people are confined to their homes – with factories and businesses at a complete halt. Now, the world’s second-largest economy is grinding slowly to suspension.

This said, former Morgan Stanley Asia Chairman Stephen Roach is pointing to the possible root cause for the next global recession: The Coronavirus.

As of this writing, around 9,000 are infected – official numbers from Chinese officials confirmed. This number has already surpassed the official cases of SARS in the mainland during the 2002/2003 outbreak.

Containing an epidemic not just involves monetary costs but has social and political consequences as well.

First and foremost, setting up facilities and mass immunization programs involves money - money that was not originally allocated. Facebook is flourishing with news, albeit fake, of hospitals and research centers in China that are being specially erected overnight to contain the problem.

Secondly, the cost of slowing all activity to a halt cuts down productivity and economic output. An outbreak will diminish GDP as more and more people would rather confine themselves at home than catch the virus somewhere else.

Third, and should this epidemic explode to a global outbreak – all fingers will point to the leadership in China for failing to curtail the problem. And that goes as well with China’s diplomatic ties. Would you shake your hands with the Chinese that sneezes?

Fourth, trade may have to stop. That goes for livestock, meat poultry, and any other items originating from China. Those second-hand Chinese goods enjoyed by third world countries may as well belong to a contaminated person – who died after catching the virus.

We are now looking at the virus as the trigger for a global recession, Stanley Roach ominously concludes the following:

Historically, the rapid expansion of cross-border trade has been an important part of the global growth cushion that shields the world economy from all-too-frequent shocks. From 1990 to 2008, annual growth in world trade was fully 82% faster than world GDP growth.

Now, however, reflecting the unusually sharp post-crisis slowdown in global trade growth, this cushion has shrunk dramatically, to just 13% over the 2010-19 period. With the world economy operating dangerously close to stall speed, the confluence of ever-present shocks and a sharply diminished trade cushion raises serious questions about financial markets’ increasingly optimistic view of global economic prospects.