By Greg Ip
The body's immune response to infection is often more painful
than the infection itself. The same is true of epidemics and the
economy.
As with terrorist attacks and financial crises, epidemics
generate widespread uncertainty and sometimes panic. Government
authorities and private individuals often respond by drastically
reducing exposure to the shock, amplifying its global economic
impact.
The stock market's steep drop on Monday reflected fears that as
the coronavirus spreads to other countries, the reaction may be as
draconian as it has been in China.
Based on health impacts alone, the coronavirus shouldn't be that
big a deal for the global economy. As of Monday it had killed 2,618
people, mostly in China, where the rate of new infections appears
to have peaked. By comparison, the Sichuan earthquake in May 2008
killed 69,000 or more without leaving any noticeable trace on
Chinese growth.
The difference is that the breadth and severity of an
earthquake's damage is much more confined and clear than a virus.
And in this case, Chinese officials are taking no chances. They
have locked down 60 million people in Hubei province, bringing
economic activity to a virtual halt.
The U.S. has warned against any travel to China and banned entry
for any non-American who has been to China in the past 14 days. In
South Korea, the disease, while spreading rapidly, has so far
killed fewer people than typically die of flu in a single day. Yet
attendance at movie theaters throughout the country this year has
already plunged 38% from a year earlier, Citigroup analysts noted:
"Fear of the virus is spreading throughout the country, at a much
faster rate than the virus itself."
Epidemiologists say there is no precedent for such a drastic
response. The epidemic, which may develop into a pandemic if it
becomes widespread in enough countries, is far larger than others
such as SARS, which originated in Asia in 2002, or Ebola, which
began in West Africa in 2014.
Since those episodes support for globalization in many countries
has been replaced by demands for stronger borders. Authorities have
fewer compunctions about raising barriers to trade and travel in
the name of disease control. The epidemic is thus one more force
working to undo globalization.
"Traditionally in public health, the interventions we know work
to slow disease down are things like diagnostics, isolation at home
or in the hospital, protecting health-care workers," said Tom
Inglesby, director of the Center for Health Security at Johns
Hopkins University. "Larger measures like things China has done
have no precedent."
"There's a lot of speculation about effectiveness and about
negative consequences, without historical data, of those kind of
macro interventions, like locking down a city, banning travel from
one part of the country, or from a country altogether," he
added.
Lawrence Gostin, director of the O'Neill Institute for National
and Global Health Law at Georgetown University, said, "We've
lurched from complacency to panic and doing things that are
overbroad and not evidence-based, with massive impact on the
economy."
He said quarantining Americans who were in an active zone of
contagion such as a cruise ship is reasonable. However, he added,
"A total travel ban on all foreign nationals...which could easily
expand without any prior notice, chills travel and commerce."
Estimates of the disease's economic impact are largely educated
guesses.
Goldman Sachs, for example, projects a 0.8 percentage point hit
to U.S. annualized growth in the current quarter from reduced
tourism, exports and supply chain disruptions, with most of that
reversed by year-end. But "risks...are skewed towards a larger hit
because a change in the news flow could lead to increased risk
aversion -- less travel, commuting or shopping."
Peter Berezin, chief global strategist at BCA Research, an
investment advisory, estimated global growth would fall to zero in
the current quarter and then rebound, for a full-year hit of about
half a percentage point. But he also sketched out a more
pessimistic scenario.
If the virus infected a billion people, as the swine flu did in
2009 and 2010, 20 million could die, he said. "Demand for most
items other than necessities would seize up." The resulting
recession would be as deep as 2008-09, though recovery would be
much faster, he predicted.
The Federal Reserve could respond by cutting interest rates,.
For now, Fed officials are monitoring the situation, wary of acting
ahead of evidence of economic harm and amid predictions any hit
would be temporary.Even if it cuts rates, but the effect would be
limited. Rate cuts boost demand for goods and services, but the
problem now is whether workers and firms can supply them.
After the Sept. 11, 2001, terrorist attacks, economic activity
plunged from coast-to-coast amid a grounding of commercial flights
and fear of more attacks. The Fed cut interest rates, but the
absence of follow-on attacks did the most to restore confidence.
Similarly, the Fed cut interest rates after Lehman Brothers failed
in 2008, but it took a federal bailout to end the panic.
Another problem is that in both 2001 and 2007-08, the Fed cut by
around five percentage points. At present, it can at most cut them
by 1.75 points before hitting zero.
Finally, how other policy makers respond is a wild card. The
U.S. and its allies cooperated in 2001 to defeat al Qaeda and in
2008 to contain the financial crisis. Today, that spirit of
cooperation has been strained by trade wars and a greater
willingness by the U.S. to act alone.
(END) Dow Jones Newswires
February 24, 2020 19:33 ET (00:33 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.