The coronavirus (COVID-19) that originated in Wuhan, China, in December 2019 has gone from nothing to a dominant global force in just two months. Its spread from the epicentre to the rest of the world has blanketed media coverage, decimated trade flows, pounded financial markets and commanded the attention of key heads of state and policymakers. The only thing outpacing the escalation of the disease is the spread of the news. How far-reaching is this planet-wide problem, how long will it last and how should we react?
News of the virus broke on the last day of 2019. Wuhan Municipal Health reported cases of pneumonia between Dec. 12 and Dec. 29. It wasn’t until Jan. 9 that these were identified as a novel coronavirus. By the end of the month, the World Health Organization (WHO) declared the outbreak, labelled COVID-19, to be a public health emergency of international concern. One month later, the WHO global and regional risk assessments were elevated to “very high,” although travel restrictions were still not recommended. As of March 11, the number of confirmed cases topped 125,000 in more than 120 countries and territories, with more than 4,500 deaths.
History is clear about the effects of widespread viruses on the economy. Against initial fears of economic meltdown, in cases that span the SARS pandemic, Avian flu, the Zika virus outbreak and even records of the Spanish flu in 1918 and 2019, the effects caused great human loss and suffering, but the economy proved remarkably resilient. It doesn’t seem to make sense; why is it so?
Speed is a key factor. Fast-spreading viruses are always surprise events, and until brought under control, chart their own course. Economic activity is interrupted so quickly, and usually so pervasively, that there are few alternative sources of supply to keep things moving. However, the basic needs of humans are still present each day, and those demands accumulate when unmet. Once the virus subsides, this pent-up demand is unleashed on the economy, and the bounce-back is typically dramatic. To be sure, there are some permanent losses that won’t be recovered—restaurant meals that weren’t eaten, business trips that were replaced by phone calls, hotels that were empty, food that spoiled and the like. But even in these cases, recovery reboots money flows, and most of what was lost eventually resumes.
Timing can be protracted if—as in COVID-19—successive waves of outbreak occur. The severity of economic fallout depends on human contacts and connections, but particularly the integration of trade. Today, the tight weave of world trade, just-in-time logistics and precise inventory management are producing a chain reaction that magnifies the impact. Moreover, the unfortunate timing of the outbreak coinciding with Chinese New Year—a time of particularly intense economic activity—has further deepened the impact.
These two critical elements of COVID-19—the duration and severity of the outbreak—remain highly uncertain currently, and this frustrates the business response. The disruption of product flows and goods-in-transit stalls orders, piles up inventories and shutters production, which together arrest payment flows. Even healthy firms can soon find themselves in a cash-crunch, unable to collect or pay; the more vulnerable, in desperate need of liquidity.
Here, public stimulus is already playing a role. On March 3, the U.S. Federal Reserve moved a few weeks ahead of its scheduled announcement date, cutting its policy rate by 0.5%. This move was designed to keep monetary conditions accommodative and to support consumer confidence, businesses and financial markets. For our part, Export Development Canada (EDC) is carefully monitoring the impact on Canadian exporters. We aren’t yet advising companies to avoid shipping to current hotspots, but we’re encouraging companies to perform due diligence in advance. That is, to do their research, using credible sources of information, and make informed decisions. EDC stands ready to support Canadian exporters through this turbulent episode.
Few businesses anywhere are untouched by these developments. While there’s strong evidence that the growth of daily cases in China is slowing and that the Chinese workforce is re-mobilizing, the rise of new cases outside of China is escalating. A key risk is that many other countries don’t have China’s ability to control population movements and commercial activity. Even so, at this time, EDC expects the negative economic impacts of the virus will play out mostly in the first half of this year, with the bulk of the global rebound occurring between July and December. Vigilance is required on all fronts to control the spread and treat those affected, as it’s now clear that taking this approach has results. Meanwhile, we can all hope for the discovery of an effective medical remedy.
