Published by Spiked – 4 March 2020
Covid-19 is not the cause of our economic malaise.
Institutions are starting to draw attention to the potential economic effects of the coronavirus outbreak. Last week, the departing governor of the Bank of England, Mark Carney, said Britain should prepare itself for an economic growth downgrade as the impact of the disease spreads. It is already clear, he said, that inward tourism had fallen and supply chains were ‘getting a little tight’.
A few days earlier at a G20 meeting in Riyadh, Kristalina Georgieva, managing director of the International Monetary Fund, stressed the economic uncertainties at this stage while anticipating a small downward global impact from the existing repercussions in China. She subsequently flagged up a potentially larger downgrade to its world growth projections in the IMF’s biannual World Economic Outlook next month. Meanwhile, the OECD has already cut its global forecast by half a percentage point, and warned that broader contagion could halve global growth this year.
Of course it is the job of economic forecasters to update their forecasts. But these organisations, and the media editors who report them, should be careful to avoid economic alarmism. They should be warning less about the disease – that’s the job of health specialists and the politicians they advise – than about the dangers of interpreting these revisions as grounds for greater anxieties and more preventative actions. The latter should be driven by health considerations, not economic ones.
This is especially important these days, because of how so many non-economic topics are now presented as of economic significance. This means we avoid discussing them in their own terms. We see this with the purpose of education, with the role of the arts, with transport infrastructure, and with the sovereignty aspects of Britain leaving the EU. Their supposed economic effects are often offered as the overriding considerations.
Care is therefore needed in presenting new economic releases on coronavirus. We must counsel against allowing this health matter to become an occasion for economic scaremongering. It should be made clear that the revised economic forecasts are little more than guesswork – however sophisticated their computer modelling is. Otherwise their interpretation could be damaging as well as hugely misleading.
Playing up the economic costs of Covid-19 could exacerbate fearful responses, as well as distract from the much longer-lasting sources of economic sickliness. Global growth and, especially, advanced-economy growth are already dismal, and have been for many years. Forecasts for this year were already pretty downbeat before most people were aware of the word coronavirus. The danger is that this acute health disease gets blamed for our economic troubles, while the chronic economic disease remains undiagnosed and untreated.
Of course, it is too early to know the full impact of the virus for people’s health and mortality around the world. Each resulting death is a personal calamity for the families affected. But however widely it spreads, the direct, and the indirect, economic effects are impossible to quantify. This is not least because there are so many other bigger influences on economic growth rates.
Investment levels, the diffusion or not of new technologies, the rate of new business, sector and job creation, the extent of zombie firms being sustained by easy and cheap borrowing… all these and more are likely to outweigh any direct economic consequences of this latest illness, even when it spreads much further. Some of these forces will bear themselves out anyway, others will interact with the consequences of the virus, and some will have a small compensating effect. Travel insurers, video-conferencing services, ‘deep office cleaning’ firms, and hand-gel manufacturers are among those getting an unanticipated boost.
The economic costs attached to ill-health in general should always be viewed sceptically. No one even really knows the economic costs of ‘normal’ diseases. As many have pointed out, annual deaths precipitated by influenza are many times the deaths so far from coronavirus. According to Public Health England, in an average year about 17,000 people in England die from flu complications, of which about four-fifths are over 65. The numbers ranged from about 1,700 deaths last winter to over 28,000 in 2014/15. Trying to define and attribute the relative effects on British gross domestic product (GDP) of a high flu death year compared to a low death year can keep economic modellers busy, but the actual effect gets lost in the longer-term influences and trends.
For instance, the economic impact of the outbreak of severe acute respiratory syndrome (SARS) in China in 2003 is usually estimated at about 0.5 per cent to one per cent of Chinese GDP. However, it is difficult to discern this in the annual pattern of overall economic growth. World Bank data for Chinese GDP growth are:
2001: 8.34 per cent
2002: 9.13 per cent
2003: 10.04 per cent
2004: 10.11 per cent
2005: 11.40 per cent
While economists can add up figures for areas of production affected by SARS, or the current virus outbreak, it is much harder for them to identify and add up all the compensating factors and actions. Even after today’s cascade of infections subsides, no one will be able to say for sure what the net economic effects were because we won’t know the counterfactual – we cannot know what would have been happening economically in the absence of this disease.
It is easy to list activities that are being disrupted by measures taken to try to contain the spread of Covid-19, or any other such prominent infectious disease. The cancellation or postponement of travel, eating out, public entertainment, sports events, conferences and business exhibitions will all hit economic output. But these real short-term losses are usually offset by other particulars, and sometimes by changes in timing. Conferences and other events can be rescheduled. Companies can increase production later to make up for current shortfalls. Firms can rebalance suppliers away from the worst hit regions. Stockpiles can be utilised. In general, economies are resilient and adaptable to dealing with the direct effect of one-off shocks, including unexpected morbidities and even mortalities.
Overreactions could have more impact than the disease
The big danger from the economicising of coronavirus is that official economic assessments, and the headlines they generate, add to a broader sense of panic. This could have sizeable indirect effects. Not only could those be socially damaging, but also they would be likely to exacerbate economic disturbances. Total deaths might stay below those of ‘normal’ seasonal flu outbreaks, but the hyped fear factor is already creating greater repercussions. If these responses continue in some countries, more businesses will curtail operations due to precautionary actions. More schools will close, necessitating parents to stay at home rather than go to work. More retail and hospitality activities won’t happen. More people will cancel travel plans, hitting business trips and tourism.
Robin Harding, the Financial Times’ Tokyo bureau chief, unearthed a number of studies of previous outbreaks of infectious diseases that found it was the responses, justified or unnecessary, that cause most social and, as a by-product, economic dislocation. Specifically, school closures and what is called ‘prophylactic absenteeism’ – that is, staying at home to avoid infection – account for most of the economic impact.
An assessment from World Bank researchers of the SARS outbreak in 2003 concluded that the estimated economic impact was out of proportion to the actual severity of the outbreak, with less than 800 deaths in total. It was how governments and societies reacted, rather than the disease itself, that caused most disruption. They drew attention to erroneous government risk-communication strategies and excessive travel restrictions as sometimes aggravating preventative actions. It is likely in the end that the (unquantifiable) economic effects of Covid-19 in different regions and countries will be disproportionately related to the prevention and mitigation measures taken, rather than to the scale of deaths.
An economic downturn was already on its way
Talking up the economic effects of virus-caused illnesses and mortalities also means camouflaging the deeper-rooted sources of contemporary economic malaise. Highlighting the economic costs of conjunctural factors puts off getting to grips with the endemic problems. Governments, economists and commentators in recent times invariably default to what they regard as the latest unwelcome happening to explain away economic lethargy. Over the past couple of years, ‘Brexit uncertainties’ and ‘trade wars’ have vied with each other as explanations for Britain’s sluggishness. The danger is that commentators now jump on the coronavirus outbreak as the latest reason for economic atrophy, and for the potential upcoming crash.
For instance, the latest data show that Italy endured its 17th consecutive monthly decline in manufacturing activity in February 2020. Future headlines that attribute an Italian economic recession this year to coronavirus would therefore be hiding Italy’s more persistent economic challenges from inadequate business investment and the constraints of eurozone membership. Grappling with these more durable issues could again be kicked away to a future that never seems to arrive.
Superficial interpretations of the decay of productive activity both ignore and conceal the precarious sclerosis that characterises all the mature industrial economies. Sclerosis derives from years of diminishing business investment in new technologies and ways of operating. As a result, people at work are no longer producing more in the same time, a break from the dominant pattern during the past two centuries of economic expansion. This waning in productivity growth – sinking to little more than flatlining in Britain – is what accounts for most people no longer benefiting from regular increases in living standards.
The precariousness of this situation arises primarily from the dependence on debt. The 2008 crash confirmed the fragility of economic systems that rely too much on borrowing and too little on creating new wealth. But precariousness also denotes the resilience of the system. We are not in permanent recession. Instead, national economies are stuck in a cycle of financial crises. Between the crashes, debt keeps things ticking along.
These intervening periods of resilience can’t last forever. But the lesson of the past 30 to 40 years is that they can last longer than seems justified by the underlying realities. It is too early to say whether Covid-19 will be the external prod to collapse the current unstable dissonance between the financial and productive economies. However, last week’s falls in stocks markets reveal this as a possibility.
A perennial feature of financialised precariousness since the 1980s has been the recurrence of price bubbles in financial markets. Company shares have often been receptacles for the funds that in the past could have gone into capital investment by businesses. Instead of being lent for transformative investment by companies, a lot of money has been going into trading the titles of ownership to these companies. When liquidity is amble, as it has been recently with central banks falling over themselves to pump out cheap money, equity prices surge upwards, especially when financial returns to ‘safer’ bonds are so low, or negative.
In these circumstances, share-price dynamics have little regard to the specific fundamentals of these firms, as long as they are not thought to be on the verge of collapse. Equity prices can diverge a long way from the underlying firm’s future earning capacity on which the share price is supposed to be based. With state support – courtesy of those easy central-bank money policies – overvalued shares can also persist for a long time.
It usually needs an external jolt for these unsound prices to tumble. People have been speculating for years over what might bring about the next financial crash. Could it be a sudden deterioration in the junk bond market for corporate debt? Could it be a trade dispute getting out of control? Could it be some international hotspot escalating and disrupting oil supplies?
Coronavirus, or specifically the government-led responses to the virus, was the proximate trigger for falls in one part of the financial markets last week. The share sell-off was pretty indiscriminate between companies with recognised demand or supply issues linked to the spread of the infection and those without such immediate connections. This indicates that the infectious outbreak was a catalyst rather than the cause of stock-market declines.
If – and it remains an if at this time – this equity ‘correction’ develops into a bigger financial implosion in the days and weeks to come, we should challenge its portrayal as the ‘coronavirus crash’ or the ‘Covid-19 recession’. Otherwise some would use this to justify panicky responses to this and future disease outbreaks. It would also run the risk of having another economic breakdown without drawing the most pertinent lesson: production across the Western world needs a thorough reset – health crisis or no health crisis.