Whilst various numbers have been bandied around, with some
estimates suggesting that the virus outbreak could shave USD 1 trillion off
world output, the truth is that nobody really knows, and efforts to estimate it
give a sense of false precision. But we can trace out the broad mechanism by
which pandemics operate. In the first instance, there is a hit to the supply
side of the economy as people fall ill. Depending on the fatality rate this can
either be a short-term or long-term effect. In the case where the fatality rate
is low and people subsequently recover, there is a short-term reduction in the
economy’s productive capacity. When the fatality rate is high, the effect is
likely to be more permanent. There is also a demand side effect as people avoid
contact with others, and as a result they shop less and consume fewer services
(e.g. they stop going to restaurants) as they enter a period of
self-quarantine.
Historical estimates of the impacts of past pandemics are
often quite hazy but the Black Death which struck Europe in the 14th century wiped out anywhere
between 30% and 60% of the continent’s population. GDP in England alone is
estimated to have declined by over 50% in the century following the plague whilst population fell by 60% (chart below). In fact, it took 200 years for output to reach pre-plague levels and 275 years for population to recover. The good news is that
(so far) COVID-19 is far less virulent than the plague which was responsible
for the Black Death. Perhaps the best comparison in terms of virulence is the
Spanish flu outbreak of 1918, which had a fatality rate of 2-3%. It infected an
awful lot of people (around 27% of the global population at the time) but its
spread was facilitated by the movement of people as World War I entered its
final stages. Scientific experts differ as to why the mortality rate was so
high: Some suggest that the pathogen itself was particularly nasty whereas
others suggest that it was no more virulent than other strains of flu but that
malnourishment and crowded medical facilities promoted superinfections that
proved to be the real problem.
I don’t want to dwell on the negative aspects but suffice to say that COVID-19 is a serious disease which has the potential to
inflict a big hit on the world economy. However, the risks and consequences are
not evenly distributed. Some sectors, such as pharmaceuticals, may actually
benefit in the short-term if they are involved in the search for vaccines,
antibiotics, or other products needed for outbreak response. On the other hand,
vulnerable populations in poor countries with reduced access to medical care
would be expected to suffer more than proportionally if things got out of hand.
As Bloom, Cadarette and Sevilla noted in a 2018 paper published by the IMF,
“several factors complicate the
management of epidemic risk” notably climate change, globalisation and
urbanisation but “perhaps the greatest
challenge is the formidable array of possible causes of epidemics, including
pathogens that are currently unknown” (as was the case with COVID-19 just
a few weeks ago). However, there is still a lot that governments can do to
limit the fallout once the epidemic takes hold including surveillance measures,
collaboration and measures to curb the spread of disease by limiting movement
(as the Chinese were quick to do).
Aside from the economic aspects, it is the natural fear of
the unknown that has caused markets to take fright. If investors are rational,
they should not be selling now. As Warren Buffett said in a TV interview, “the real question is: ‘Has the 10-year or 20-year
outlook for American businesses changed in the last 24 or 48 hours?” There
again Buffett is 89 years old and mortality statistics suggest there is a 14.87% chance that he will depart from this life in the next
year (sorry Mr B. Blame the actuaries!). But if you are a 35-year old investor, you might have a different
outlook on things and fear of the unknown is a powerful influence on behaviour.
However, to put a positive spin on things, as the number of Chinese cases
continues to rise – albeit at a slower pace – so does the number of recoveries,
with 35% of those diagnosed now having been cleared, and they outnumber deaths
by a factor of 18:1.
As Bloom et al wrote, “We
cannot predict which pathogen will spur the next major epidemic … But as long
as humans and infectious pathogens coexist, outbreaks and epidemics are certain
to occur and to impose significant costs.” The best we can do is to take
actions to manage the risk and mitigate their impact, although as the deadly outbreak of Ebola in West Africa in 2014 showed, it is possible to limit the consequences relatively quickly. Let’s hope so.
