by Calculated Risk on 2/28/2020 12:41:00 PM
Friday, February 28, 2020
Several readers have asked about the economic impact of the novel coronavirus. The answer is it depends on the severity of the epidemic.
Goldman Sachs economists wrote this morning:
Our new baseline scenario involves a continued slowdown in infections in China that allows for a slow recovery in high-frequency indicators of economic activity. However, it also includes moderate supply chain disruptions in the global goods-producing sector, as well as a hit to consumer spending and business activity from national outbreaks that go well beyond China and the other countries (such as Korea and Italy) that have been affected so far. Our analysis shows effects on quarter-on-quarter annualized global GDP growth of -5pp in Q1 and -2pp in Q2, followed by a rebound in the second half of 2020, leaving our full-year global growth forecast at about 2%. All else equal, this would imply a short-lived global contraction that stops short of an outright recession.That is a wide range of outcomes. If the epidemic slows sharply (perhaps due to seasonality), then the economy should recover quickly. However, if the epidemic continues to spread rapidly, then we could be looking at a global recession (and an enormous human tragedy).
We also consider two alternative scenarios. The upside scenario assumes that the global spread of the virus is brought under control quickly and supply chain disruptions remain mostly absent; if so, global GDP would rebound in Q2, risk asset markets would recover sharply, and central banks may stay on hold. The downside scenario assumes widespread supply chain disruptions as well as domestic demand weakness across the global economy. This would involve sharp sequential contraction in global GDP in Q1 and Q2—i.e., a global recession—and probably an aggressive monetary easing campaign, including a return to the near-zero funds rate of the post-crisis period.
There will be an immediate impact on travel, and not just to Asia (we are starting to see slack in the US hotel occupancy rate). And there could be an impact on US consumer spending, especially on high priced items like cars and housing (although lower interest rates are a positive). I expect areas like Las Vegas will be hit hard for the duration of the health crisis (cancelled conventions or low attendance)
We need accurate information, especially on the number of daily tests - both positive and negative results - and advice from experts on how and when to alter our behavior (social-distancing, etc). It is concerning that one of the first acts of VP Pence was to the muzzle the experts at the CDC and HHS. This is reminiscent of what happened in 1918.
In 1918, at the beginning of the crisis, government officials tried to put a positive spin on the flu epidemic. From the Smithsonian magazine:
[W]hile influenza bled into American life, public health officials, determined to keep morale up, began to lie.Right now the best data is from the CDC and the WHO. I'll write more on the possible impact as more information becomes available.
Early in September, a Navy ship from Boston carried influenza to Philadelphia, where the disease erupted in the Navy Yard. The city’s public health director, Wilmer Krusen, declared that he would “confine this disease to its present limits, and in this we are sure to be successful. No fatalities have been recorded. No concern whatever is felt.”
The next day two sailors died of influenza. Krusen stated they died of “old-fashioned influenza or grip,” not Spanish flu. Another health official declared, “From now on the disease will decrease.”
The next day 14 sailors died—and the first civilian. Each day the disease accelerated. Each day newspapers assured readers that influenza posed no danger. Krusen assured the city he would “nip the epidemic in the bud."
Posted by Calculated Risk on 2/28/2020 12:41:00 PM